Two prominent Democratic senators levied a withering attack on federal bank regulators on Thursday, accusing them at a Senate hearing of putting the interests of banks ahead of consumers in refusing to disclose what they know about the failed foreclosure review program that ended abruptly earlier this year.
Most aggressive was Sen. Elizabeth Warren, a Massachusetts Democrat and longtime consumer advocate who is quickly developing a reputation as perhaps the Senate's most effective cross-examiner. Following a series of probing questions that would not have been out of place in a court room, Warren excoriated the regulators for not immediately turning over case records of borrowers who may be considering private legal action against their bank.
"You have made a decision to protect the banks but not to help the families who were illegally foreclosed on," Warren said. "Families get pennies on the dollar for being the victims of illegal activities."
She continued: "You know of cases where the banks broke the laws, but you are not going to tell the homeowners. People want to know that their regulators are watching out for the American public, not the banks. Without transparency, [we] cannot have any confidence in your oversight or that markets are functioning correctly."
Over the past few months Warren and other legislators have repeatedly asked bank regulators at the Office of the Comptroller of the Currency and the Federal Reserve for more information about the case-by-case review of homeowner loans that was dropped in January in favor of a blanket $9.3 billion settlement.
At the hearing before the Senate Banking Committee, Warren and Sen. Sherrod Brown (D-Ohio) made clear that they were not happy with the answers lawmakers have received thus far about the program, which is widely considered an expensive and lengthy debacle.
Last week, the Government Accountability Office issued a scathing report of the reviews, finding that regulators did not provide proper oversight and that some errors likely went undetected. On Tuesday, regulators released new information suggesting that banks may have made errors in as many as 30 percent of all loans that qualified for a review, a figure far higher than previously reported.
Thursday's hearing was framed by the Senate committee as an opportunity to understand better the relationship between the financial institutions that agreed to the loan reviews nearly two years ago, and the independent consultants -- companies like Promontory Financial and Deloitte -- hired by the banks to conduct the reviews. As HuffPost and others have reported, those reviews were compromised by inconsistent oversight of the often-poorly trained contract employees and by improperly close relationships with the banks themselves.
Under questioning from Sen. Jack Reed, a Rhode Island Democrat, regulators came the closest to acknowledging that the reviews, which resulted more than $2 billion in payments by the banks to consultants, were poorly conceived and supervised.
"The OCC and the Fed greatly underestimated the complexity of the task," said Daniel Stipano, a top lawyer at the OCC. He cited the number of financial institutions, consultants and homeowners involved and the difficulty in negotiating state law as among the challenges that reviewers and regulators had to negotiate.
Asked if he thought the structure of the reviews was appropriate in hindsight, Stipano responded "no."
"We would take a different approach" if the process were done again, he said. He declined to say what changes regulators might make in the future.
Brown led off the committee by asking officials to reveal the name of an independent consultant that regulators had admonished for shoddy work. The officials declined, citing the confidential bank-regulator relationship. They did not rule out the possibility of disclosing the name of the consultant in the future.
Brown seemed to find this response unsatisfactory. "How does disclosing the identity of an underperforming third-party entity damage the relationship with banks?" he asked.
Warren focused many of her questions on the January settlement into which most of the banks conducting the foreclosure reviews entered. That deal requires they distribute $3.6 billion in cash payments to 4.4 million homeowners who received a foreclosure notice in 2009 or 2010 -- a number far greater than the half-million or so who applied for a foreclosure review with a specific complaint. Most borrowers will receive less than $1,000 each.
Warren noted that regulators have given conflicting answers as to the number of loans that reviewers found to contain bank errors. Regulators have said roughly 100,000 reviews were completed, or nearly so, when the program ended. The Federal Reserve, for example, initially said that errors were detected in 6.5 percent of those loans, but subsequent estimates have put the percentage both higher and lower than that figure, Warren said.
"If you had believed that the banks had broken the law in 90 percent of cases, would you have settled for more money?" she asked Daniel Ashton, a top lawyer at the Federal Reserve. "Doesn't it matter how many homeowners were victims of illegal activities by their bank?"
"Our priority was to get cash to borrowers," Ashton responded.
"[It is a] question of getting the right amount of cash to the right people, isn’t that right?" Warren said.
After a few more minutes of back and forth, Warren said, "The number is critical. It tells us how much illegal activity there was ... but 6.5 percent is a made-up number."
She continued: "What is the right number? If you can’t correctly tell how many people were the victims of illegal bank actions, how can you possibly decide what is the appropriate amount for a bank settlement?"
"An estimate would have required additional delay," Ashton answered.