WASHINGTON — Requiring defendants to admit guilt in a settlement or consent order could delay remediation, spur more litigation and threaten safety and soundness, financial regulators told a House panel on Thursday.

Enforcement officials from the Securities and Exchange Commission, Federal Reserve, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency said the policy of allowing institutions to "neither admit nor deny" guilt encourages faster corrective action from institutions, and provides relief to borrowers or investors much quicker than a drawn-out court case would.

"Requiring an admission of guilt as a condition of entering into a consent action we believe would have a deleterious effect on our supervisory efforts by causing more institutions and individuals to contest the requested relief in formal administrative proceedings, which typically would take years to reach resolution" Scott Alvarez, the Fed's general counsel, told the House Financial Services Committee. "That would substantially impede and delay implementation of corrective action and potentially harm the financial institutions and the financial system."

Still, Democrats raised concerns about the frequent use of "neither admit nor deny" clauses in recent settlements, and whether the clauses limit the ability of regulators to discourage bad acts in the future.

"Settlements should never be viewed as just another cost of doing business," Rep. Maxine Waters, D-Calif., said. "And I fear that could be the case — when no wrongdoing is admitted, [it] encourages repeat offenses."

Waters and other Democrats had called for the hearing after a judge issued a scathing rejection of an agreement last year between the Securities and Exchange Commission and Citigroup (NYSE:C), in which the bank agreed to pay $285 million with no admission of wrongdoing.

Indeed, most of the panel's questions were directed at the SEC's enforcement director, Robert Khuzami, who defended the agency's use of settlements to resolve certain cases.

Despite the SEC's limited resources to pursue litigation, Khuzami said the enforcement division only recommends a settlement when it believes the agreement is "within the range of outcomes that we could reasonable expect if we had litigated the case."

He said the Citigroup case in particular included injunctive relief, business reforms, charges against individuals within the bank, and a $285 million payment, which Khuzami said represented 81% of the amount regulators could have gotten under a best case scenario if they had prevailed in court.

"Given that statement and given the totality of the settlement, it's not clear to me what an admission would add and whether it would be worth the cost of delay and resources," he said.

Richard Osterman Jr., the FDIC's deputy general counsel for litigation and resolutions, agreed that requiring institutions to admit guilt in enforcement actions could have the unintended consequence of delaying prompt corrective action.

OCC Deputy Chief Counsel Daniel Stipano said the requirement could cause many institutions to challenge the agency's findings in court. Even if the OCC is successful, it could take years to issue an order; in the meantime, unsafe and unsound practices could cause a bank's situation to deteriorate, or could continue to harm consumers.

"In either case, resources of an institution that could have been used to fix a problem are instead diverted to financing litigation," Stipano said.

Republicans said lawmakers and courts ought to leave discretion with the regulators, who have better insight into the merits of each case, the resources necessary to pursue them and the potential benefits of a settlement versus a win in court.

"One can always second guess, but should do so with caution when second guessing one in a better position to make that judgment call," Chairman Spencer Bachus said.

Bachus also and noted that a federal appeals court had temporarily stayed the original Citigroup decision, ruling that it was not the place of federal judges to dictate policy to administrative agencies.

Some Democrats agreed that settlements were an important tool for providing relief to borrowers, investors, deposit holders or taxpayers, but suggested that more needs to be done to discourage repeat offenses.

"We at a point now where businesses can simply sit and plan and conclude that we will have 'x' number of settlements, 'x' amount of damages possible, and as a result let's prepare for this knowing that we can cover and move on," said Rep. Al Green, D-Texas. "There has to be some means by which businesses that settle these lawsuits also see themselves as being held accountable for wrongdoing."

Rep. Barney Frank, the panel's top Democrat, said he planned to work on a measure that would allow SEC Chairman Mary Schapiro to issue additional penalties for repeat offenders.

"One of the things that frustrates people is people promising not to do it again for the second, third, fourth and fifth time," he said.

Frank and other Democrats also lamented the SEC's limited budget, which Khuzami agreed is a factor in determining how many cases to pursue in court.

"If you're doing Case A, you're not doing Case B," he said. "So there are opportunity costs for everything.."

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