WASHINGTON — Regulators received a bipartisan beat-down at a House Financial Services subcommittee hearing Thursday over their failure to detect problems in the foreclosure process.
Lawmakers noted that this was not the first time that agency heads had come before them acknowledging they were caught flat-footed but were now focused on the problem, with several appearing fed up with the regulators.
"To me it gets a little frustrating that the people who were put in charge and were supposed to know, who are regulating the financial markets, are continuing the theme of their testimonies: 'We didn't know,' " said Rep. Randy Neugebauer, R-Texas. "But when we bring you in, your testimony is: 'But we're on it now.' I think the American people have a greater expectation that you know it before it happens rather than after it happens."
Members of the housing subcommittee were particularly incensed that the agencies did not know about the problem until after it was reported by the media.
"Were you aware of these problems before the news reports. … Were any of you?" asked Rep. Spencer Bachus, R-Ala., the front-runner to chair the House Financial Services Committee next year.
Regulators confirmed that they did not know beforehand.
"We were not aware of it before we read about it in the newspaper," said Federal Reserve Board Gov. Elizabeth Duke.
After Acting Comptroller of the Currency John Walsh acknowledged the same thing, Bachus sparked laughter in the hearing room after he said, "I'm glad you read the newspapers."
Lawmakers on both sides of the aisle were at a loss to understand why regulators were so in the dark, particularly in cases like Ally Financial Inc, where the institutions themselves already knew of problems.
"Obviously in a way they would have been visible to you or should have been, if they were visible to the banks internal controls," Bachus said. "The regulators are also inside some of those banks looking. I wonder why they weren't visible?"
After a brief but awkward pause, David Stevens, the assistant secretary of housing for the Department of Housing and Urban Development, said regulators had found some issues while looking at how servicers conduct loan modifications, but they had not gone deep enough to the final stages of the foreclosure process.
"We sent teams in this year to a number of the larger servicers to do loan-level reviews of their entire foreclosure processes and loss-mitigation process. We didn't look to the final check of who is signing the affidavits," he said. "We were not aware of the robo-signing particular piece but as this has drawn out it clearly is highlighting broader concerns we had about how servicers are handling the foreclosure process in total and we have already completed several in-depth research reviews of several of the largest servicers and we are working through the process as to what action will come from that."
But Rep. Maxine Waters, the housing subcommittee chairman, excoriated the regulators, skipping a 15-minute recess for votes on the House floor so that she could spend time pressing the regulators on why they have taken no serious actions against servicers within their purview.
"Since we started experiencing the fallout from the subprime boom, has the OCC taken enforcement actions of their servicers?" she asked the OCC's Walsh.
When Walsh responded that the agency has issued requirements on matters that require attention, Waters pushed, "Have you levied any fines?"
Waters said servicers clearly did not take regulators seriously.
"Do you think the servicers really believe that you mean business if they don't have to fear any consequences?" she asked.
Walsh responded, "The consequences are quite clear and present in that we can take actions and threaten more serious penalties."
But Waters countered that "you haven't done that. You haven't done any of that. Why should they take you seriously?"
Waters also questioned why examiners didn't know more about what was going on. "If you have examiners on-site can you explain how you don't know about all the problems that are in servicing? What do examiners do?" she asked.
Walsh said that the OCC relies partly on banks' internal controls, which clearly failed in this instance. "We are focused on the modification process," he said. "We do rely on the systems and the controls of the financial institution, its own internal audit or any flags that raise the issue like our complaint function and unfortunately those did not raise an alarm bell in this process."
A key focus of the session with regulators was why it is so difficult for borrowers to achieve a modification. Waters asked the regulators how many of them have actually dealt with a call center and tried to modify a loan themselves.
Only the Treasury Department's Phyllis Caldwell, chief of the Homeownership Preservation Office was able to provide personal anecdotes of helping her mother-in-law and another family.
Waters, who has personally contacted servicers on behalf of constituents, said the process was geared to avoid giving borrowers a modification.
"Are you aware that it's almost impossible to get to the servicer?" she asked. "That the systems now have screeners and they have a cookie-cutter sheet and they ask a number of questions and if they determine that the ratio of debt to earnings is not deserving of a modification, they don't get to the servicer."
Ultimately, Waters signaled she had lost faith in the regulators.
"I would like to thank you for basically just reiterating what you all have said over and over again … coming here saying 'We are working on it. Yes, we are moving on it,' " she said. "And yet you cannot show us that in this period of time that you have done anything to bring about penalties or levying fines or to show us that you are serious about assisting the homeowner."