WASHINGTON — The man responsible for ensuring that five of the nation's largest banks comply with the massive multi-state mortgage servicing settlement has a stark message for the five banks involved: make sure your internal review teams are independent and thorough.

Joseph A. Smith, the former North Carolina banking commissioner, said he is concerned that banks' internal groups, which will issue quarterly reports on compliance, act independently from the banks' mortgage servicing units.

"I have had some conversations with the banks, and will have more, about what steps they take to assure the independence of those groups," Smith said in one of his first interviews he's given since taking the job. " I hope that these groups are properly staffed and properly independent, because the alternative will be that the report that they make will not be credible."

If that happens, Smith will have to spend more time looking over banks' shoulders to ensure they are complying with the massive settlement.

"I believe we'll work through this, but it's still in discussion," he said.

How he will handle his own workload is another concern. Smith said he wants to keep his own staff small and rely heavily on contractors to help him review the self-monitoring work that must be done by Bank of America (BAC), Citigroup (C), JPMorgan Chase (JPM), Wells Fargo (WFC), and Ally Financial.

He says two criteria — independence from the banks and the outside firm's capacity, which involves its size and expertise, among other factors — as being the keys as he determines which firm or firms will land the contract. He will begin the process of hiring outside help this week and hopes to wrap it up by mid-May.

"The balance has to be struck between independence and capacity," Smith said. "I'm not going to automatically choose one of the usual suspects. We're going to go through a fairly significantly analytical program, or I should say winnowing-out program, where we're going to look at a lot of different alternatives to see what's available, and I'll do my very best to select a firm or firms that have the proper blend of independence and capacity."

Many of the large U.S. law firms and accounting firms have long-standing client relationships with the large banks, which could make it difficult to find a qualified firm that is free of conflicts of interest.

The issue is further complicated by the fact that numerous large law firms and accounting firms have been hired by banks as part of a separate foreclosure review process being run by federal banking regulators.

Smith was hired in February to monitor the settlements reached between the five large mortgage servicers and 49 states over robosigning and other servicing abuses. The settlements, which were approved in federal court last week, total $25 billion.

The money is slated to come largely from mortgage modifications that will result in a reduction of what homeowners owe — but whether the eye-popping total is reached will likely depend on the effectiveness of the monitoring. Other anti-foreclosure programs in recent years have fallen short of expectations, and critics have blamed a lack of effective enforcement.

Since stepping down as North Carolina's banking commissioner on Feb. 14, Smith has had a lot on his plate. He returned to the Raleigh law firm Poyner Spruill LLP, where he was once a partner. He established the Office of Mortgage Settlement Oversight as a non-profit corporation that will be funded by assessments on the five banks that are participating in the settlement. And he has begun meeting with bank officials, including a gathering in Charlotte last month with all representatives of all five banks.

The Office of Mortgage Settlement has also launched a website — www.mortgageoversight.com — where homeowners and consumer advocates will soon be able to file complaints about particular servicers.

Smith said that his office will not investigate those complaints — it will instead provide homeowners with information about how to get help from other organizations — but it will use the data it collects as part of its job of monitoring compliance with the settlement.

"And the hope I have is that these portals will be used by consumers and by advocates to help inform me of what's going on out in the marketplace," Smith said. "This will help confirm or not confirm what's going on in the other enforcement activities I'm doing, and what's going on in the banks as they try to comply with this agreement. So it's a helpful feedback loop. But I don't want to overstate what this will do."

"It is not in my scope of authority, frankly, to be the arbiter of mortgage disputes, as much as I would like to be, candidly. But I just can't. I'm not authorized to do it, and it would be just a massive project," he added.

When the settlement was announced in February, the state attorneys general said that violators would pay fines of up to $1 million and up to $5 million for repeat offenses.

Smith said that those are the maximum penalties allowed under the settlement terms, and he suggested that any fine would be determined on a case-by-case basis.

"In my own whole career in supervision, the way we determined fines, and this includes both the non-bank mortgage business and bank themselves, is that you really tailor, you tailor the remedy to the violation," he said. "So I'm not sure we're going ever have a violation schedule. I'm confident if we need to impose fines, we'll be able to set them in a way that is appropriate for the violation that we're talking about."

Smith also addressed the concerns of investors in mortgage-backed securities who are upset that the banks will get credit for reducing principal on loans they service but do not own. Smith indicated that he is willing to meet with those investors, but he did not betray much sympathy for their situation, noting that the settlement gives the banks more credit for reducing principal on the loans it owns than it does for loans owned by others.

"I am notorious for speaking with whoever wants to talk to me, and they are obviously an interested party," Smith said.

"I do think my own first review of the agreements shows — and I've talked to some of the banks about this; they get much more credit for so-called owned loans, or portfolio loans, than they do for loans for securitization — so my sense is that, well, we'll see. The economic incentives are clearly to deal with portfolio loans first."

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