Regulator Explains Decision to End Flawed Foreclosure Review

A top regulator shed light Wednesday on his decision to scuttle an independent review of bank foreclosures, portraying the flawed process as a boon to outside consultants and a barren maze for homeowners.

At a luncheon speech in Washington, Thomas J. Curry, the Comptroller of the Currency, outlined the shifting stages of the independent foreclosure review, a process that began in 2011 when regulators accused banks and other loan servicers of shoddy foreclosure practices.

Mr. Curry, who took over the role several months after the review started, argued that homeowners languished without payment as the review suffered from delays. The independent consultants that banks hired to run the 14-month review, however, racked up some $2 billion in charges.

“It just doesn’t make sense forthese servicers to continue funneling money to consultants that could be better used to help distressed borrowers who have lost their homes,” according to a copy of his written remarks before the Women in Housing and Finance group.

The speech comes amid a growing outcry from lawmakers and housing advocates, who have questioned the regulatory oversight of the foreclosure review. Critics argue that regulators should never have trusted consultants to objectively evaluate banks from which they are paid huge sums.

Mr. Curry recalled a pivotal moment in November 2012 that came as he reviewed the consultants’ compensation. He detected a stunning contrast with their $2 billion payday: “we were still not ready to compensate the first borrower,” he said.

The Comptroller’s office, he said, “came to the realization that maintaining our course would significantly delay compensation withou! t appreciable benefit to the affected borrowers. I decided we needed to change direction.” The Federal Reserve, which also oversaw the review, agreed.

The regulators instead opted to strike a multi-billion dollar settlement with the nation’s largest banks, ordering them to make $3.6 billion in cash payments to homeowners. Regulators expect to dole out the first payments to homeowners in late March.

To accelerate the payments, the comptroller’s office decided to cut the consultants out altogether. Instead, according to people involved in the process, regulators are turning to the banks for help. The banks will now have to assess each loan for potential errors, which will help determine the size of the payments to homeowners.

While the process presents a potential conflict of interest, regulators say they will check the work. And banks have already agreed to pay a fixed amount to hmeowners, regardless of what they find in the loan files.

In switching gears, the Comptroller dealt a blow to consultants once central to the process. In late 2011, regulators ordered the nation’s largest banks to hire consultants to determine whether homeowners were wrongfully evicted.

PricewaterhouseCoopers signed deals with four banks, including Citigroup. Promontory scrutinized foreclosures for Wells Fargo, Bank of America and PNC. Deloitte & Touche handled JPMorgan Chase’s loans.

Mr. Curry explained that his move to halt the review “was not a decision I made lightly.” The consultants, he said, helped provide a “unique understanding of the nature of the problems with foreclosure practices.”

But the reviews were plagued with problems from the onset. Some consultants warned that they were not detecting any harm under the narrow terms that regulators set. Other consulting firms, including Promontory, farmed out some work to contract employees. They all faced questions about their objectivity, as they were paid billions of dollars by the same banks they were asked to investigate.

Mr. Curry, however, did offer some support for the consultants.

“The processes established by the consultants to complete the reviews were very thorough and in some cases involved thousands of checkpoints, which reflected the extraordinarily complex laws and rules invlved in mortgage servicing and foreclosure processing,” he said.

Even with the flawed review ending, Mr. Curry voiced hope that regulators’ actions will assuage concerns about the foreclosure process.

“It’s critical that we restore trust in this industry so that families undergoing foreclosure can have faith that they will at least be treated fairly,” he said.