WASHINGTON — Democratic senators grilled regulators on Thursday over their handling of the failed independent foreclosure review and the decision to halt it in favor of a $9.3 billion settlement that provided only meager returns to the vast majority of affected borrowers.

While the theme of the Senate Banking subcommittee hearing was banks' use of independent consultants to complete the foreclosure review, several of whom appeared as witnesses on a second panel, it was regulators that faced the toughest criticism from Democratic lawmakers. (No Republicans attended the hearing.)

Sen. Elizabeth Warren, D-Mass., suggested that regulators had no evidence to support the final settlement figure, and had failed to provide critical information about the extent of borrowers harmed by illegal foreclosure practices. The entire incident called into question who regulators represent.

"People want to know that regulators are looking out for the American public, not the banks," Warren said. "The whole point of this review was to bring some justice…to hold financial institutions that broke the law accountable."

Sen. Sherrod Brown, who chaired the financial institutions subcommittee hearing, focused on the extensive use of consultants during the foreclosure review, arguing that regulators failed to identify uniform standards governing their actions.

"The underlying problem here is pretty clear. There's the independence, the quality of these consultants," Brown said.

Officials from the Office of the Comptroller of the Currency and the Federal Reserve Board were quick to admit that the review went awry and involved much more work than they anticipated.

"I think that the OCC and the Fed greatly underestimated the complexity of the task. The number of the institutions involved, the number of consultants involved, the number of borrowers involved, the sheer number of decision points — which I am told are in the hundreds, if not the thousands, per file," said Daniel Stipano, deputy chief counsel at the OCC. "Shifting legal requirements, compliance with 50 state laws, compliance with HAMP guidelines, GSE guidelines — it was inordinately complex and we did not fully appreciate that. It seems easy now, but it wasn't at the time, and the best proof of that is if you go back and look at the consent order, we gave servicers 120 days to get this done, which is astounding to me. We were into it for more than a year and we were nowhere near done."

But pressed about how they would have organized the process differently in light of these failures, they offered few tangible suggestions.

"I think if we had it to do over again we would take a different approach," said Stipano, while stipulating that "there are a number of alternatives, and all of them have different pros and cons."

Lawmakers questioned why the OCC couldn't have handled the loan reviews itself, rather than forcing banks to hire their own consultants.

The agency would have to "triple or quadruple the size of our staff or pretty much shut down our bank supervision operations, and that's not an option," Stipano replied.

He added that federal procurement rules and requirements would substantially slow down efforts to have the agency select consultants for the banks.

"These types of engagements have to be competitively bid. … We would expect there would be lots of bids. There would be contests and challenges. We might still be at a point now where we would not have begun the IFR because we're still going through the procurement process," Stipano said.

Regulators didn't want the banks to handle it internally either, viewing that situation as worse.

"They were the ones that cause the problem in the first place," Stipano said.

Sen. Jack Reed, D-R.I., urged regulators to begin hiring their own consultants, dismissing concerns about federal procurement rules slowing down the process.

"Every major program in the federal government, it usually has an aspect of competitive bidding, and yet it gets done," he said. "There's an inherent conflict between hiring your inspector or having your inspector through the federal government … and that tension's always going to be there."

Reed added: "I think you've got to have a new process. And I think if the process requires modification of federal rules and regulations, then that's something the OCC and the Fed should immediately demand of us. Because essentially what you describe is a core activity of the OCC — stopping the wrongdoing of regulated institutions and protecting consumers."

During the hearing, Stipano asked lawmakers to give the OCC the power to seek sanctions against independent contractors. At least Brown appeared amenable to such a request, noting that out of the seven consultants the banks hired, one was repeatedly told to fix certain problems but did not comply. Brown asked Stipano to identify that firm, but the OCC official said it was considered confidential information. (Later witnesses from Deloitte, Promontory Financial Group and PricewaterhouseCoopers said they were not the firm.)

Warren, meanwhile, focused primarily on the settlement that replaced the foreclosure reviews, pressing regulators and consultants repeatedly on the accuracy and statistical significance of agency figures on how many borrowers were the victims of illegal activity by the banks.

"If you can't correctly tell how many people were the victims of illegal bank actions, how can you possibly decide how much money is an appropriate amount for settlement?" Warren asked regulators during the first panel.

Reviewers examined roughly 100,000 files during the course of the review, about 13% of the 700,000 files that had been set aside and just 2% of the estimated 4 million affected borrowers, according to the Massachusetts Democrat. Richard Ashton, the Fed's deputy general counsel, insisted that the regulators settled with the banks in order to get payouts to borrowers faster. But Warren said that wasn't good enough.

"I understand the point about delay [in getting payments to consumers], but that doesn't mean you pick a [settlement] number out of the air," she said. "Have the families been protected or have the banks been protected?"

Warren later pressed consultants to detail the error rates they discovered in the loans they received. While Promontory's Konrad Alt said he did not have those figures handy, representatives from PwC and Deloitte said such information is privileged. James Flanagan, the leader of the financial services practices at PwC, did reveal how much consultants were paid for their work, however. He said the firm earned $190 million for its review of US Bank's loan files, $175 million in fees for its work with Citigroup and $60 million for its review of SuntTrust's files.

Owen Ryan, a partner in Deloitte's audit and enterprise risk services, said the firm would disclose the amount it was paid to review JPMorgan's files if the OCC gives approval, and Alt, a managing director at Promontory, said the firm would consider disclosing that information.

House lawmakers have also raised concerns about the use of independent consultants during the foreclosure review. Rep. Maxine Waters, D-Calif., the top Democrat on the House Financial Services Committee, introduced a bill Thursday to overhaul consultant contracting.

The Stop Outsourcing Banking Enforcement and Examination Act, cosponsored by Democratic Reps. Elijah Cummings, Al Green and John Conyers Jr., would mandate strict conflict of interest rules and bar consultants from reviewing their own work or participating in a consent order if their work would be reviewed by others.

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