It was pitched as good news for foreclosed-upon borrowers: Last month regulators announced an extension for those seeking reviews of servicers' actions under the April 2011 federal consent orders. Consumers now had until yearend to submit claims.
I think the big mortgage servicers, and their consultants, are in no hurry to start the reviews. They’d love it if these megabanks never have to pay borrowers a dime.
"Reviews are still underway. We hope the compensation will begin soon with a limited number of borrowers receiving compensation in the fourth quarter of 2012" says Bryan Hubbard, a spokesman for the Office of the Comptroller of the Currency. Regulators have been promising lump-sum payments "from $500 to, in the most egregious cases, $125,000 plus equity," for a while. But, as yet, there have been no payments to borrowers. The independent consultants, engaged by the large banks and paid directly by them, haven’t yet made any payment recommendations, according to Hubbard.
Who’s getting paid in the meantime? The independent consultants.
Financial services consultant Promontory and global audit firm PricewaterhouseCoopers are the biggest winners, with seven of the 14 foreclosure review engagements between them. Deloitte is responsible for the behemoth engagement at JPMorgan Chase that includes reviewing mortgages from its former audit clients Bear Stearns and Washington Mutual. Ernst & Young is leading engagements at MetLife and HSBC and assisting Promontory with a big job at Bank of America, where the foreclosures include many mortgages messily underwritten and sloppily serviced by Countrywide.
PwC has reportedly billed more than $50 million for Ally Financial’s Residential Capital since May 2011. The total estimate for that engagement is now at least $250 million. Sources estimate PwC’s total revenue for its four foreclosure review engagements will eventually exceed $1 billion– its largest consulting win ever.
It’s in consultants' best interests to extend the foreclosure review engagements as long as possible without coming up with an estimate for each servicer of its total liability to borrowers. The big banks don’t want to see that number – they would have to disclose it and few have done any preliminary disclosure of this exposure or even the costs of the reviews. The consulting firms want the megabanks as clients, now and in the future. There’s even more money available for policy, procedure and technology remediation of the problems that caused the "errors" in the first place, and those contracts are not constrained by an OCC or Federal Reserve review of conflicts.
That’s where the borrower deadline extension – and the upcoming presidential election –come in.
The "independent consultants" talk amongst themselves on weekly conference calls that do not include the regulators. The consulting firms are still talking about the "framework" for reviewing foreclosure files and estimating borrower liability. These conference calls, in my opinion, undermine the OCC and Fed goals of ensuring the consultants'independence by directly controlling their activities.
The conference calls cover the status and strategy for the foreclosure reviews at each mortgage servicer. After all the effort by regulators to ensure contracts were given only to consultants with limited conflicts of interest at each bank, these discussions could provide a competitive or strategic advantage to "independent consultants" that want to sell work to another bank later. The calls also raise conflicts, and a potential reporting burden, for audit firms like Deloitte, PwC and Ernst & Young if issues at their audit clients are discussed, especially discussions that suggest the occurrence of fraud or illegal acts.
When I asked Hubbard at the OCC to guess why I had a beef with these calls, he mentioned another worrisome possibility: Consulting firms could collude to minimize the financial impact of the reviews on banks that are clients, and potential clients, for all of them.
But Hubbard says regulators also hold weekly meetings with the consultants. "The objectives of the conversations between the consultants are to share best practices, promote consistency and respond to specific direction from the regulators. While regulators have endorsed and supported these types of conversations, regulators have also stressed the importance of not improperly disclosing confidential supervisory information, including private customer information."
Unfortunately, a firm with the most to lose from a conflict of interest or a breach of client confidentiality – an audit firm – is accused of breaching that trust in another bank regulatory case. Deloitte, now reviewing its own work at JPMorgan, is accused of abdicating its duties as a regulatory monitor at Standard Chartered Bank. The New York Department of Financial Services accused Deloitte of helping the bank doctor regulatory reports that glossed over ongoing money laundering violations and of giving the bank copies of other client reports for guidance.
I believe the large banks, with the help of the consultants, are trying to run out the clock on the foreclosure reviews. It’s no secret that the megabanks, and many of the independent consulting firms involved in the foreclosure reviews, are supporting and sending more campaign contributions to the Republicans and Romney in 2012 than to President Obama. They’re counting on a Romney win, I think, and a pass on paying borrowers who were foreclosed on in error or were cheated. Under a Romney administration, who would complain if banks never complied with these orders fully?
It’s time for the big banks, and their independent consultants, to stop stalling and prepare to finally pay borrowers for foreclosure abuses.
Francine McKenna writes the blog re: The Auditors, about the Big Four accounting firms. She worked in consulting, professional services, accounting and financial management for more than 25 years.