```

[Senate Hearing 113-34]
[From the U.S. Government Publishing Office]

                                                         S. Hrg. 113-34

 
     OUTSOURCING ACCOUNTABILITY? EXAMINING THE ROLE OF INDEPENDENT 
                              CONSULTANTS

=======================================================================

                                HEARING

                               before the

                            SUBCOMMITTEE ON
             FINANCIAL INSTITUTIONS AND CONSUMER PROTECTION

                                 of the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                                   ON

 EXPLORING THE ROLE OF INDEPENDENT CONSULTANTS IN FINANCIAL REGULATION 
WITH A FOCUS ON THE USE OF INDEPENDENT CONSULTANTS BY THE OFFICE OF THE 
       COMPTROLLER OF THE CURRENCY AND THE FEDERAL RESERVE BOARD

                               __________

                             APRIL 11, 2013

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs

                 Available at: http: //www.fdsys.gov /

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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  TIM JOHNSON, South Dakota, Chairman

JACK REED, Rhode Island              MIKE CRAPO, Idaho
CHARLES E. SCHUMER, New York         RICHARD C. SHELBY, Alabama
ROBERT MENENDEZ, New Jersey          BOB CORKER, Tennessee
SHERROD BROWN, Ohio                  DAVID VITTER, Louisiana
JON TESTER, Montana                  MIKE JOHANNS, Nebraska
MARK R. WARNER, Virginia             PATRICK J. TOOMEY, Pennsylvania
JEFF MERKLEY, Oregon                 MARK KIRK, Illinois
KAY HAGAN, North Carolina            JERRY MORAN, Kansas
JOE MANCHIN III, West Virginia       TOM COBURN, Oklahoma
ELIZABETH WARREN, Massachusetts      DEAN HELLER, Nevada
HEIDI HEITKAMP, North Dakota

                       Charles Yi, Staff Director

                Gregg Richard, Republican Staff Director

                       Dawn Ratliff, Chief Clerk

                     Riker Vermilye, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                 ______

     Subcommittee on Financial Institutions and Consumer Protection

                     SHERROD BROWN, Ohio, Chairman

       PATRICK J. TOOMEY, Pennsylvania, Ranking Republican Member

JACK REED, Rhode Island              RICHARD C. SHELBY, Alabama
CHARLES E. SCHUMER, New York         DAVID VITTER, Louisiana
ROBERT MENENDEZ, New Jersey          MIKE JOHANNS, Nebraska
JON TESTER, Montana                  JERRY MORAN, Kansas
JEFF MERKLEY, Oregon                 DEAN HELLER, Nevada
KAY HAGAN, North Carolina            BOB CORKER, Tennessee
ELIZABETH WARREN, Massachusetts

               Graham Steele, Subcommittee Staff Director

         Michael Bright, Republican Subcommittee Staff Director

                                  (ii)
?

                            C O N T E N T S

                              ----------                              

                        THURSDAY, APRIL 11, 2013

                                                                   Page

Opening statement of Chairman Brown..............................     1

Opening statements, comments, or prepared statements of:
    Senator Warren...............................................     3

                               WITNESSES

Daniel P. Stipano, Deputy Chief Counsel, Office of the 
  Comptroller of the Currency....................................     3
    Prepared statement...........................................    37
    Responses to written questions of:
        Chairman Brown...........................................    55
        Senator Reed.............................................    59
        Senator Menendez.........................................    65
Richard M. Ashton, Deputy General Counsel, Board of Governors of 
  the Federal Reserve System.....................................     5
    Prepared statement...........................................    41
    Responses to written questions of:
        Chairman Brown...........................................    88
        Senator Reed.............................................    90
        Senator Menendez.........................................    92
Konrad Alt, Managing Director, Promontory Financial Group, LLC...    21
    Prepared statement...........................................    43
    Responses to written questions of:
        Chairman Brown...........................................   100
        Senator Reed.............................................   101
James F. Flanagan, Leader, U.S. Financial Services Practice, 
  PricewaterhouseCoopers LLP.....................................    22
    Prepared statement...........................................    48
    Responses to written questions of:
        Chairman Brown...........................................   102
        Senator Reed.............................................   104
Owen Ryan, Partner, Audit and Enterprise Risk Services, Deloitte 
  and Touche LLP.................................................    24
    Prepared statement...........................................    52
    Responses to written questions of:
        Chairman Brown...........................................   104
        Senator Reed.............................................   105

                                 (iii)

     OUTSOURCING ACCOUNTABILITY? EXAMINING THE ROLE OF INDEPENDENT 
                              CONSULTANTS

                              ----------                              

                        THURSDAY, APRIL 11, 2013

                                       U.S. Senate,
                     Subcommittee on Financial Institutions
                                   and Consumer Protection,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Subcommittee convened at 10:11 a.m. in room 538, 
Dirksen Senate Office Building, Hon. Sherrod Brown, Chairman of 
the Subcommittee, presiding.

          OPENING STATEMENT OF CHAIRMAN SHERROD BROWN

    Senator Brown. The Subcommittee will come to order.
    I thank Senator Reed and Senator Warren for joining us. 
Senator Toomey was planning to be here, is in the middle of 
negotiations with Senator Manchin on the gun safety issue and 
the background checks. I saw them all over television this 
morning. I know that it is ongoing. The vote is going to be at 
11 o'clock, so we will--I am hoping Senator Toomey can still 
get here and others on that side of the aisle, but we think we 
should proceed. I know Senator Reed and Senator Warren have 
both stepped out for a minute, but their place will be 
reserved.
    We will recess sometime between 11 and 11:15 for 15 
minutes--I am going to keep it to 15 minutes--so I can go vote 
and come back. But we do not want to make any of the five 
witnesses, this panel or the second panel, wait any longer than 
they have to. But I wanted to thank you. And there will be 
opening statements, too, after I am done.
    Thanks, all, for being here. This is our first Subcommittee 
meeting in this session of Congress, in the 113th Congress. 
Thanks for the cooperation of the minority and my staff, all of 
you, for the work that you did in the Senate, the full 
Committee staff, on helping on a fairly complicated hearing.
    In the financial crisis and its aftermath, we have seen 
case after case of wrongdoing at financial institutions, from 
money laundering for terrorist groups to illegal foreclosures 
that devastated families, communities, and in many ways broke 
so many people's lives.
    The rise in enforcement actions combined with the increased 
complexity of banks and bank regulation has led to an increase 
in the use of independent consultants. At the OCC alone, nearly 
one-third of their legal actions since 2008 have required banks 
to hire an outside consultant to review their actions and to 
propose solutions. Some top consultants are staffed by scores 
of former regulators. We are reading more and more about that. 
And some have reportedly--some of these reports have said 
charges have been as much as $1,500 an hour. Because most 
consulting firms are private companies, there is little 
transparency about their business model to either the public or 
to Congress, leaving us to wonder about financial incentives, 
leaving us to wonder about business relationships.
    Recently, we have heard about consultants hired at 
regulators' request to find and to fix illegal activity. In 
these few high-profile cases, they either miss serious problems 
or gave the banks a free pass.
    It has come to my attention that one of seven consulting 
firms participating in the Independent Foreclosure Review, the 
IFR, was given formal written notice, quote, ``of an 
opportunity to improve,'' unquote, their performance on more 
than one occasion. According to staff reports, there were 
multiple discussions between and among the consultant staff, 
including senior leadership, and OCC regulators. Yet the 
consultant in question had not cured its deficiencies at the 
time that the Foreclosure Review Settlement was announced.
    In a January 28 letter of this year to me, Comptroller 
Curry recognized that, quote, ``additional reporting will 
improve transparency and understanding of the IFR and the 
agreement,'' the settlement agreement. But the identity of this 
consultant has still not been made available to the Congress or 
to the American people.
    This raises serious concerns about the ability of this 
consultant and others in the future to provide thorough work 
that will help impose or bring more accountability to our 
financial system. With so little information about these 
consultants and whom they report to, it is impossible for 
Congress and for the public to hold them accountable.
    In the case of the mortgage review, the partnership between 
the public sector regulators and private consultants appears to 
have been poorly managed from the start. That is really the 
subject of this hearing. The apparent lack of uniform standards 
and clear procedures undermined any possibility of effective 
management of such a large and amazingly expensive and 
important endeavor.
    We hope to clarify today this foggy relationship among 
private consultants and public regulators to better understand 
these arrangements, to identify ways to counteract the risk 
created by potential conflicts of interest and misaligned or 
badly aligned incentives. When you consider the potential for 
what James Kwak calls ``cultural capture,'' also somebody at 
the Peterson Institute called it ``cognitive capture,'' and the 
influence of the revolving door, bright line rules become even 
more important, become essential.
    I want to thank Mr. Stipano for his suggestion that 
Congress should strengthen the OCC's authority to discipline 
rogue consultants. I agree that this is something this 
Committee should consider.
    Thank you again for joining us. Senator Warren, your 
opening statement.

             STATEMENT OF SENATOR ELIZABETH WARREN

    Senator Warren. Thank you, Mr. Chairman, and thank you very 
much for holding this hearing. Thank you, Mr. Stipano and Mr. 
Ashton, for coming here today.
    Over the last few months, Congressman Elijah Cummings and I 
have requested documents from your agencies regarding the basic 
data and the processes of the Independent Foreclosure Review. 
We made 14 specific requests to you in January, and despite 
multiple letters back and forth and multiple meetings, you have 
provided only one full response, three partial or minimal 
responses, and no response to nine of our requests. You have 
provided little specific information on what the review 
actually found, such as the number of improper foreclosures, 
the amount and number of inflated fees, or the extent of 
abusive practices by each of the mortgage servicers.
    So I am hoping in this hearing to give you an opportunity 
to provide us with some greater clarity than you have thus far 
offered in our meetings and our correspondence. Thank you.
    Senator Brown. Thank you, Senator Warren.
    I would like to introduce the first panel. Daniel Stipano 
is the Deputy Chief Counsel at the Office of the Comptroller of 
the Currency. He supervises the OCC's enforcement and 
compliance litigation, community and consumer law, and 
administrative and internal law divisions. He also represents 
OCC on the Treasury Department's Bank Secrecy Act Advisory 
Group and the National Interagency Bank Fraud Working Group.
    Richard Ashton is the Deputy General Counsel for the Board 
of Governors at the Fed. He has supervised litigation 
enforcement and system matters since 2006. He has primary 
responsibility for litigation and formal enforcement activities 
of the agency.
    Mr. Stipano, if you would begin. Keep it to 5 minutes, 
because we will almost certainly do multiple rounds of 
questions for both panels, so if you could stay close to 5 
minutes. Thank you.

STATEMENT OF DANIEL P. STIPANO, DEPUTY CHIEF COUNSEL, OFFICE OF 
                THE COMPTROLLER OF THE CURRENCY

    Mr. Stipano. Thank you, Chairman Brown, Senator Warren. 
Thank you for this opportunity to discuss the OCC's use of 
articles and enforcement documents that require banks to retain 
independent consultants.
    It has been our longstanding practice to use such articles 
in appropriate cases. The purpose of requiring banks to retain 
independent consultants is to provide expertise and resources 
to assist banks in correcting unsafe or unsound practices and 
violations of law identified through our supervisory process. 
Their work has resulted in the correction of operational and 
management deficiencies, led to the filing of thousands of 
suspicious activity reports in Bank Secrecy Act cases, and 
facilitated the payment of hundreds of millions of dollars in 
restitution to bank customers in cases involving unfair or 
deceptive practices.
    There are a number of reasons why we may require a bank to 
retain an independent consultant. First, independent 
consultants have subject matter expertise that the bank does 
not. This is particularly true with respect to community banks. 
The consultants can apply their knowledge and experience to 
focus on the supervisory issue, identify its scope, and work 
with bank personnel to correct violations and unsafe or unsound 
practices.
    Second, independent consultants can provide the resources 
necessary to correct problems in a timely manner. Once again, 
this is particularly helpful to community banks, which 
sometimes do not have sufficient resources to do so.
    Finally, independent consultants are, as the name suggests, 
independent from the operational area that needs to be reviewed 
or enhanced. Thus, rather than having the bank review itself, 
the OCC may require the use of a third party as a fresh pair of 
eyes to assess the scope of the problem and the remedy. In all 
cases, however, it is the OCC's job to determine whether the 
bank's corrective actions are sufficient.
    Independent consultants have been particularly effective in 
ensuring that banks address significant management and 
operational deficiencies. For example, in a sizable number of 
cases, when supervisory concerns have arisen concerning the 
ability of bank management to perform an accurate review of the 
quality of a bank's loan portfolio, the OCC has ordered the 
bank to retain an independent consultant to conduct a review of 
asset quality until such time as the bank develops and 
implements an internal asset quality review system that is 
demonstrated to be effective.
    Similarly, in cases in which there are questions about the 
accuracy of a bank's books and records, the OCC has required 
the institution to retain an auditor to review those records to 
assess their completeness and report on any deficiencies. The 
OCC has also ordered banks to retain independent consultants to 
perform annual reviews of methods used by banks to establish an 
allowance for credit losses. The OCC has required similar 
engagements by bank management to address deficiencies in a 
variety of other circumstances involving, for example, real 
estate appraisals, compensation, internal controls, and 
information technology systems.
    The majority of these cases is concentrated in community 
bank enforcement actions and reflects the fact that those 
institutions often have the greatest need for expertise and 
resources that an independent consultant can provide. However, 
we have used independent consultants in cases involving 
institutions of all sizes. In all of these cases, the OCC 
considers the qualifications of the firms or individuals 
proposed for each engagement, and we do not permit the bank to 
retain consultants we believe are unqualified or have conflicts 
that would compromise the objectivity of their work. The OCC 
also oversees and monitors the work of the consultants through 
our supervisory process and we validate the results to ensure 
that the violations or practices that were the basis of the 
enforcement action have been corrected.
    The circumstances in which we used independent consultants 
in the Independent Foreclosure Review differed substantially 
from the typical case. The unprecedented breadth, scale, and 
scope of the reviews, the large number of institutions, 
consultants, and counsel involved in the process, and the 
complexity of the reviews, which involved hundreds, if not 
thousands, of individual decision points for each file 
distinguished the IFR from the normal type of file review that 
is conducted by independent consultants. It also required an 
unprecedented level of regulatory oversight and coordination. 
This oversight included the issuance of guidance, examiner 
visitations to the locations of the consultants, and daily 
communications among consultants, servicers, and the OCC 
throughout the process.
    While the use of independent consultants has generally 
served the agency well in terms of accomplishing our 
supervisory objectives, we believe there are lessons to be 
learned from our experience and we are currently evaluating our 
use of independent consultants and exploring ways to improve 
the process.
    Thank you, and I would be happy to answer your questions.
    Senator Brown. Thank you, Mr. Stipano.
    Mr. Ashton, thank you. Please proceed.

 STATEMENT OF RICHARD M. ASHTON, DEPUTY GENERAL COUNSEL, BOARD 
           OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

    Mr. Ashton. Chairman Brown, Senator Warren, thank you for 
the opportunity to testify regarding the required use of third-
party consulting firms in Federal Reserve enforcement actions.
    At the outset, it might be helpful to point out that 
regulated banking organizations routinely choose to retain 
consultants for a variety of purposes, apart from any 
supervisory directive by regulators to do so. Banking 
organizations decide to retain consultants because these firms 
can provide specialized expertise, familiarity with industry 
best practices, and a more objective perspective in staffing 
resources that the regulated organizations do not have 
internally.
    In the vast majority of Federal Reserve enforcement 
actions, the organization itself is directed to take the 
necessary corrective and remedial action. In relatively 
infrequent circumstances, the Federal Reserve has required a 
regulated organization to retain a consultant to perform 
specific tasks on behalf of that organization. Importantly, 
consultants are used to conduct work that ordinarily the 
organization itself would be required to conduct, but has shown 
that it cannot perform itself.
    At all times, the Federal Reserve retains authority to, and 
does, review and supervise the consultant's work, in the same 
manner as if the organization conducted the work directly. In 
all cases, the regulated organization and not the consultant is 
itself ultimately responsible for its own safe and sound 
operations and compliance with legal requirements. In deciding 
to require the use of consultants in appropriate cases, the 
Federal Reserve does not cede its regulatory responsibilities 
or judgments to those consultants.
    As a general rule, our enforcement actions may require the 
use of consultants because of a lack of specialized knowledge 
or experience or insufficient resources at the particular 
organization. In addition, it may be necessary to have a third 
party undertake a particular project because a more objective 
viewpoint is required than would be provided by the 
organization's management. Thus, we have required the use of 
consulting firms to review and report on a specific area of 
operations, to review prior transactions to determine whether 
required reports were filed, and to administer consumer 
remediation programs.
    When enforcement actions require a regulated banking 
organization to use a consultant to carry out a particular 
function, the Federal Reserve oversees the organization's 
implementation of this directive. Our standard practice is to 
require approval of the particular consulting firm retained by 
the organization. In making this decision, we look at the 
consultant's expertise, experience, resources, capacity, and 
separation from management. We also normally require approval 
of the letter between the organization and the consultant 
describing the scope, terms, and conditions of the particular 
engagement. Finally, we also oversee the consultant's 
performance during the course of the engagement, which can 
involve obtaining and reviewing interim progress reports and 
periodic meetings with the consultant. If a consultant is not 
meeting the required standards of performance, then we direct 
improvements where necessary.
    I would be pleased to answer any questions from the 
Committee.
    Senator Brown. Thank you, Mr. Ashton. Thank you, both of 
you, again, for staying around 5 minutes. I appreciate that.
    Mr. Stipano, I appreciate your testimony. I said in my 
opening statement that one consultant participating in the IFR 
was doing substandard work. When a consultant fails to meet its 
obligations under a consent agreement, that information should 
be disclosed so that--my belief--so that we can be assured that 
consultants are up to the task. Will you tell us--you have not 
disclosed that yet--will you tell us the name of the firm in 
question?
    Mr. Stipano. Senator, I am not in a position to do that. It 
is a longstanding policy of the OCC not to disclose 
confidential supervisory information to individual Senators or 
Congressmen. There are certain legal consequences for us if we 
do that. There are also processes that are available and that 
we follow to provide confidential supervisory information to 
Congress in the exercise of its oversight functions.
    Senator Brown. So how does--OK. I want to talk more about 
that process, but how does disclosing the identity of an 
underperforming, I guess is the best word, consultant, the 
third party, prove harmful to the relationship between the OCC 
and the banks that you regulate?
    Mr. Stipano. Well, there are a number of things. I think 
that, in general, to the extent that we are talking about 
confidential supervisory information, it is a fundamental 
premise of the whole bank supervisory process that we get to 
have access to all the bank's books and records. We get to see 
whatever we want. We get to form whatever supervisory 
conclusions that we form and then take appropriate action. And 
we are still in the process of doing that with respect to the 
IFR and the IFR settlement. We are kind of in mid-stream.
    If we were to depart from that, there are consequences that 
could undermine a supervisory process. It could make 
institutions less willing to be forthcoming with us during 
examinations. And to the extent that we are contemplating 
actions, whether it is against an institution or an independent 
contractor, were we to disclose that while we are still in the 
middle of a process, that could potentially affect the action 
that we ultimately take.
    There is also a legal issue concerning the waiver of the 
bank examination privilege. Courts have recognized that there 
is such a privilege, that the opinions of examiners, their 
mental processes, the iterative process between examiners and 
between banks is all protected and is something that we are not 
required to disclose. If we voluntarily disclose privileged 
bank examination material, then we waive the privilege as to 
the world.
    Senator Brown. There is a bigger issue, and we are not 
probing every detail of that relationship. I mean, there is a 
bigger issue here. There is, first of all, the most important 
thing, the fragility of the financial system that Americans, as 
responding to what Senator Vitter and I and Senator Warren and 
a number of us are doing. We hear all the time that Americans 
still do not have confidence in the stability of this financial 
system, and taxpayers have not gotten a whole lot out of this 
settlement so far. Homeowners are getting an average of about 
$300. And you have information about a consultant that might be 
hired in the future in a perhaps perilous situation and the 
people hiring that consultant might not know of its failures. 
So does not the public interest outweigh that----
    Mr. Stipano. I think it does----
    Senator Brown.----knowing who it is, not with all the 
details of what necessarily went wrong, depending on what that 
consultant wants to say at that point.
    Mr. Stipano. I think it does, and we do intend to--we have 
issued some public reports on the IFR to date. We intend to 
issue more of them. Again, we are kind of in mid-stream in the 
process right now. I mean, we are wrapping up the IFR. We still 
have a couple of institutions that are still conducting the 
IFR. Plus, we are trying to implement the IFR settlement. So we 
do anticipate doing public reporting.
    We are also still in an evaluative phase. I am not really 
sure at this point what the message would be, and part of our 
evaluation is to take a look at the conduct of the servicers 
themselves and take a look at the consultants and then form 
conclusions. We are still doing that.
    Senator Brown. OK. We expect that. I mean, I know that you 
announced and removed Allonhill and other consultants, so there 
is some precedent. We will get to that. Let me do one more 
question then turn it to Senator Reed.
    Given that the regular consulting business is lucrative, 
and we have seen certainly examples of this in this situation, 
consultants have a financial incentive to do things that will 
attract repeat business, and the largest banks have deep enough 
pockets to use these consultants on a pretty regular basis. 
Independent consultants provide a quasi-public function. It is 
a peculiar function, obviously, as you know, because they are 
paid by the banks, but they are doing work supposedly in the 
public interest. I think it is useful for us to understand this 
compensation structure.
    My comments and this question is this. Understanding there 
are concerns in the case of the IFR with one consulting firm--I 
will not mention it, but one--to disclose bank-specific 
compensation information--in other words, they only did one 
bank, so that might violate the bank's proprietary knowledge 
there--do you consider a consulting firm's compensation in a 
given matter to be confidential supervisory information? In 
other words, would you be comfortable with public disclosure of 
firms' compensation, both in the IFR and on an ongoing basis?
    Mr. Stipano. I do not consider the disclosure of the 
compensation received for an engagement to be confidential 
supervisory information unless the disclosure would reveal 
examination techniques, examination strategies, the iterative 
process between examiners and the bank.
    Senator Brown. So at some point, we will know what each of 
these seven firms was paid?
    Mr. Stipano. It is not the OCC's role to have to approve or 
disapprove the disclosure of that information.
    Senator Brown. Two of the consultants--and this is what 
makes me especially curious. We know that these seven firms 
were paid somewhere upwards of $2 billion, which was more than 
one-fifth of the settlement. That speaks of, did that money 
come out of the settlement? Put that aside for a moment. What 
is particularly curious, two of the consulting firms have told 
us that the engagements, they thought, would generate between 
$5 and $8 million--$5 and $8 million. When all was said and 
done, a firm at the lower end could conservatively have made 
$200 or $300 million. You just take $2 billion and you divide 
it by seven and you have a number 25 or 30 times the $5 to $8 
million.
    I assume that consultants regularly provided you with 
status reports that included their compensation, correct? You 
got regular reports how much money they were spending?
    Mr. Stipano. We are knowledgeable about the compensation, 
yes.
    Senator Brown. So at what point--when a couple of firms 
said $5 to $8 million that this would cost, at what point did 
you realize there might be a problem with the IFR process? Did 
it occur to you that when the number exceeded $50 million there 
might be a problem, or when it reached $100 million or $500 
million or a billion? When did you think there might be a 
problem?
    Mr. Stipano. OK. I do not think that that decision was 
driven by the amount of money being paid to the consultants. 
When we created the IFR--and just by coincidence, the Consent 
Orders that started this whole process were issued exactly 2 
years ago, and the IFR itself has been in place for more than a 
year--what we were trying to do was to set up a process that 
would allow the institution, with the assistance of the IFR, of 
the consultants, to identify borrowers who were financially 
harmed by the servicers' wrongdoing. And then once they 
identified them, the Consent Orders required the servicer to 
come back to us with a plan, subject to our approval, to 
remediate the harm, to pay compensation to the affected 
customers.
    I think that the OCC and the Fed greatly underestimated the 
complexity of the task. The number of the institutions 
involved, the number of consultants involved, the number of 
borrowers involved, the sheer number of decision points, which 
I am told are in the hundreds if not the thousands per file, 
shifting legal requirements, compliance with 50 State laws, 
compliance with HAMP guidelines, GSE guidelines, it was 
inordinately complex and we did not fully appreciate that. It 
seems easy now. It was not at the time.
    And the best proof of that, if you go back and look at the 
Consent Orders, we gave the servicers 120 days to get this 
done, which is astounding. I mean, we were into it for more 
than a year and we were nowhere near done.
    So notwithstanding all that, we were committed to making 
this work. We did make adjustments along the way. We wanted to 
see this be successful. But as we were getting to the point 
where we were up to a year, we were past a year, and no checks 
were going out to any borrowers, nor did it appear that many 
checks would be going out to any borrowers any time soon, we 
felt like there had to be a better way to do this, and that is 
what really prompted the IFR settlement.
    I am not here to tell you that it is a perfect process, 
what we have done, but the goal behind it, and what we have 
done and what we are going to achieve starting tomorrow, is to 
quickly get cash into the hands of the affected borrowers, and 
that was something that was not happening under the IFR.
    Senator Brown. Did any of these consultants, any of the 
seven come to you and say they had concerns about the rate at 
which the costs were growing, or did anybody on your staff? I 
mean, I just cannot imagine when you thought 120 days--and I 
understand people make misjudgments, but 120 days--you are 
saying 120 days, they are saying $5 to $8 million. When it goes 
way beyond earlier than the 120, you were beginning to see this 
is tens of millions, hundreds of millions, did these 
consultants, did any of them say that they had concerns about 
the rate it was growing?
    Mr. Stipano. I think, as with the regulators, the 
consultants were doing their very best to try to follow the 
guidance and the direction that they were getting from us. 
There were lots of problems and hurdles that arose along the 
way that slowed the process down, all of it really going to the 
complexity of the task. And, up until the time when we decided 
to settle the matter and not continue the IFR, we were still 
all committed to trying to make it work.
    Senator Brown. Let me ask one more question and then turn 
to Senator Reed. Were the fees paid by the banks, the two-
point--upwards of $2 billion--was that considered in setting a 
settlement amount to be paid by those banks? In other words, 
did that amount, that $2 billion, result in less compensation 
for borrowers?
    Mr. Stipano. Not at all. We required----
    Senator Brown. How do you know that?
    Mr. Stipano. As part of the settlement, we required the 
servicers to set up a Qualified Settlement Fund and to put 
money into that, and all of the compensation that goes to the 
borrowers is coming out of the fund. The amounts that they have 
paid to the consultants is not a factor.
    Senator Brown. And when was that determined, when the 
fund--the size of the fund?
    Mr. Stipano. It was negotiated toward the end of last year, 
the beginning of this year.
    Senator Brown. But if you are the bank and you have 
realized you have spent, pick a number, $328 million or $90 
million----
    Mr. Stipano. Yes.
    Senator Brown.----on paying Consultant X, do you not think 
that affected their negotiations on how large a settlement it 
would ultimately be?
    Mr. Stipano. I cannot speak for the banks----
    Senator Brown. How do you know that it did not, is the 
better question.
    Mr. Stipano. I do not know that it did not, because I 
cannot get inside their head. We had certain goals in mind in 
terms of negotiating to an amount that we thought would be 
sufficient, and we did not factor in the amount that they were 
paying to the consultants.
    Senator Brown. OK. Senator Reed.
    Senator Reed. Thank you, Mr. Chairman.
    I have still the same question that I had about a year ago 
when this issue came up. I think, Mr. Stipano, you said it, 
that basically the core of this issue is financial harm to 
borrowers because of the wrongdoing of banks, not because of 
just the economy moved and they were unfortunate.
    Mr. Stipano. Yes.
    Senator Reed. That seemed to me the essence of what the OCC 
and the Federal Reserve, their responsibility as regulators. So 
why would you delegate that responsibility, effectively, to 
consultants who did not have a relationship with you, had a 
contractual relationship with the bank----
    Mr. Stipano. Yes.
    Senator Reed.----why?
    Mr. Stipano. Well, we thought it was the best alternative. 
There is clearly----
    Senator Reed. Do you still think it is the best 
alternative?
    Mr. Stipano. No. I think if we had it to do over again, we 
would take a different approach.
    Senator Reed. You will have it to do over again. So what 
today is the policy of the Office of the Comptroller of the 
Currency with respect to investigating wrongdoing of banks? Is 
it to hire, augment your staff with a contractual relationship 
with these consultants directly?
    Mr. Stipano. Yes.
    Senator Reed. Or is it to let the banks pick their favorite 
consultant?
    Mr. Stipano. Well, there are a number of alternatives. All 
of them have different pros and cons. The problem with having 
the OCC do this work itself is that it is just beyond the means 
of any Federal banking agency to do this. I mean, again, the 
size, the scale, the scope, the complexity. It is not a 
question of bringing on some more examiners. We would probably 
have to triple or quadruple the size of our staff or pretty 
much shut down our bank supervision operations. That is not an 
option.
    We could contract directly ourselves. The problem that we 
run into there are Federal procurement rules and Federal 
procurement requirements. These types of engagements have to be 
competitively bid. In this kind of an engagement, where there 
is a lot of money at stake, there would be a lot of interest 
among many consultants in getting that business, so we would 
expect there would be lots of bids. There would be contests and 
challenges. We might still be at a point now where we have not 
even begun the IFR because we are still going through the 
procurement process. So we felt that was too unwieldy and not a 
good option.
    And the only other option would be to have the banks 
themselves do it, but they were the ones that caused the 
problem in the first place.
    So given the alternatives, we felt that this was the best 
option. I think there are different approaches that we could 
have taken that we did not take in the design of the problem. 
And what we are doing right now, and I have to be honest with 
you, Senator, I do not have all the answers as I sit here, but 
we are looking back at what we did. We are evaluating it and we 
are going to come up with ways to do this better in the future.
    Senator Reed. So your bottom line was because it had to be 
competitively bid, you felt that was not the appropriate 
approach.
    Mr. Stipano. Yes, and maybe that----
    Senator Reed. And----
    Mr. Stipano.----and I am not an expert on Federal 
procurement rules, but we have experts in my agency that we 
consulted with, and the advice that we were given was that if 
we were to go down that road, the process would go on for a 
very, very long period of time and it would delay getting money 
into the hands of the affected borrowers.
    Senator Reed. Unlike the process you chose, which is going 
on for a long time, has not gotten a lot of money into the 
borrowers, and has been deemed a total failure.
    Mr. Stipano. That process did not work, either.
    Senator Reed. Yes. So I think you have got to have a new 
process, and I think if the process requires modification of 
Federal rules and regulations, that is something that the OCC 
and the Fed should immediately demand of us.
    Mr. Stipano. OK.
    Senator Reed. Because, essentially, what you described, 
what is the core activity of the OCC, stopping the wrongdoing 
of regulated institutions and protecting consumers, I mean, 
among safety and soundness, so those are sort of the three 
critical issues. And if you do not have the statutory framework 
to do that effectively, you have got to tell us, one.
    But two, I would go back very strongly, because that is 
some of the shibboleth around here. Oh, competitive bidding is 
so difficult, et cetera. There are contests. Every major sort 
of program in the Federal Government usually has an aspect of 
competitive bidding, and yet it gets done. So I would suggest 
that you adopt a policy immediately that you are not going to 
rely upon bank-selected or regulated-selected consultants, that 
they will be directly hired by the OCC.
    To raise an issue, and I want to raise the same question 
with the Fed, is that I would presume that because they were 
able--they did, in fact, conduct contractual relations with--
those contracts were drafted and approved by the institutions, 
and I would assume that the obligations of the consultants were 
primarily to the person they had the contract with, not the 
OCC.
    Mr. Stipano. No, I do not think that is accurate. We did 
require that the contracts be submitted to us for our review 
and we directed the servicers to put language into the 
contracts that made it clear that the independent consultants 
were acting pursuant to our direction, not the servicers.
    Senator Reed. In reality, did the independent consultants 
act at your direction?
    Mr. Stipano. I believe so, yes.
    Senator Reed. Can you provide us documentation to that 
effect?
    Mr. Stipano. I do not know if there is documentation. We 
would be happy to discuss it with your staffs.
    Senator Reed. Let me ask the Federal Reserve, because you 
have a slightly different legislative structure. Do you feel 
that you had to retain consultants through the banks and not 
directly hire them by the Federal Reserve?
    Mr. Ashton. Senator, when we set up the process with the 
OCC, we started out with the model that Mr. Stipano has 
described, and we had had a history of requiring banks to 
retain independent consultants to do certain discrete tasks, 
like find situations where a suspicious activity report had to 
be filed. And I think we thought at the time that that model 
could be adopted for something as extensive as this. What we 
found out in practice was that the scope of the review--that 
independent consultants had to find every single injury--was so 
extensive and time consuming that the model was just not 
effective. And that is why we decided to change it.
    Senator Reed. But let me ask you a question. Does the 
Federal Reserve have the authority and the resources to 
contract directly with the appropriate consultants to conduct 
reviews of banks or financial holding companies in which you 
select the contractor, they have a contractual obligation 
directly to you, not through a third party? Do you have that 
authority?
    Mr. Ashton. Senator, I think if we were going to do this 
again, we probably would have to consider different types of 
models and that would be one model.
    Senator Reed. I----
    Mr. Ashton. I do not think we have looked into the 
authority question.
    Senator Reed. Well, I would suggest you look into the 
authority question, and I would suggest that both the OCC and 
the Federal Reserve adopt that approach. It seems to me there 
is this inherent--and you are talking about people who are 
professionals on both sides. But there is an inherent conflict 
between hiring your inspector or having your inspector come 
from the Federal Government, even as an augmentee through a 
contract. And that tension is always going to be there, even if 
it is a different context. And I just think to delegate the way 
you did an essential regulatory function by essentially asking 
the banks to choose their inspector just does not work and will 
not work.
    And if there are authorities you need, and I am very--the 
Fed has such expansive authorities, I would be shocked--because 
I would like to see the competitive bidding that you have done 
in the past on lots of issues. I would be shocked if you needed 
the authority. But that seems to be the lesson of this. We can 
go back and do--and we will--the post-mortem on how it happened 
and what you are going to do to fix it. But going forward, I 
think that is the lesson that has to be drawn.
    Mr. Chairman, I thank you. I think this is very important. 
Do you have----
    Senator Brown. Yes, I am going to go, and then Senator 
Warren will be back and we will do a second round.
    Thank you for your insight into Senator Reed's questions. 
You talked about an inherent conflict, and the underlying 
problem here is, I think, pretty clear. There is the 
independence. There is the qualifications of these consultants. 
And let me kind of take it in a different way.
    Do your agencies have clear, objective, independent 
standards--independence standards for these consulting firms? 
These firms, these seven firms, most of them have done, 
obviously, a lot of work with OCC, with the Fed, and more 
directly with the banks. Does OCC have clear, objective 
standards for these consulting firms, and share them with us if 
you do.
    Mr. Stipano. The critical factor in our minds, first and 
foremost, is that any consultant that is brought on have the 
right resources and expertise to do the job. I mean, that is 
separate, really, from independence, but nonetheless very 
important.
    On the independence point, it is not realistic in most 
cases to expect that independent consultants would have no 
prior ties to the institution. I mean, they are used so widely 
throughout the industry that most consultants that have the 
resources and the expertise have done work before. So trying to 
find consultants that are totally pristine in that regard is 
not really practicable.
    However, what we do look for are situations where, because 
of prior work, the consultant is conflicted in such a way that 
it could compromise their objectivity. And on the IFR, there 
were a couple of factors, in particular, that we were focusing 
on. The one was if the consultant had done work before such 
that by taking on the IFR engagement, they would essentially be 
reviewing or re-reviewing their own work, that was something 
that we would consider to be disqualifying.
    And, similarly, if the consultant was involved in an 
advocacy role, like if they were involved, for example, in 
negotiating with us on the cease and desist orders or 
negotiating with the State Attorney Generals on the National 
Mortgage Settlement, we would consider that to be 
disqualifying. And we did disqualify some of them on those 
grounds.
    Senator Brown. We are not--you used the word ``pristine.'' 
We do not expect pristine here. That sounds----
    Mr. Stipano. I----
    Senator Brown.----too difficult. But we do expect, I think, 
clearer standards in what ``qualified'' means. For instance, if 
a consulting firm, and there is one in this situation, has 
repeatedly been, for lack of a better term, at the scene of a 
crime, what would it take before they are viewed as not 
qualified? What if they--for instance, what if they 
underestimated the value of an institution's money laundering 
transactions by $250 billion or presented watered-down reports 
to regulators? That would not be enough for disqualification 
under your standards?
    Mr. Stipano. Well, again, I think you have to look at the 
total context, but I do believe this is an area where there are 
lessons to be learned for us and we are committed to exploring 
ways to do better. Maybe that results in some kind of written 
standards. We do not presently have them. But I think this is 
an important area and we are committed to doing a better job.
    Senator Brown. Has there been a process started to write 
these standards?
    Mr. Stipano. I think we are still in an evaluative phase, 
but I think the goal is to have----
    Senator Brown. Well, wait. You are in an evaluative phase. 
This is not just the IFR. This is since 2008----
    Mr. Stipano. Yes.
    Senator Brown.----the number of----
    Mr. Stipano. I know.
    Senator Brown. You are still in an evaluative stage on 
whether you are going to write standards----
    Mr. Stipano. No, we----
    Senator Brown.----for the future?
    Mr. Stipano. No----
    Senator Brown. You are evaluating the other, but before you 
begin to write these standards?
    Mr. Stipano. I think that, to a certain extent, the 
standards that get produced will be informed by our experiences 
with the IFR. We still need to wrap up the IFR and discern what 
those lessons learned are.
    Senator Brown. Since you are--I mean, understanding you 
have to farm out many things because of consultants and the 
size of OCC, but can you not sort of process all of this 
evaluative IFR and other consulting at the same time another 
part of OCC starts to write these standards of what 
``qualified'' means?
    Mr. Stipano. It is--we are at a beginning stage. We have 
not really reached a point of putting pen to paper.
    Senator Brown. I hope that point starts this afternoon.
    One other question about that and then I will turn to 
Senator Warren. Alan Blinder, a founder and, I believe, still 
director at Promontory--this is according to Bloomberg--said 
that the foreclosure reviews were, quote, ``outside 
Promontory's sweet spot, requiring the firm to hire hundreds of 
people.'' It has been reported they did not just--and I will, 
of course, direct this question to the second panel and give 
them a chance, give the gentleman from Promontory a chance to 
speak to this. But it has been reported they just did not 
outsource outside the firm, they went outside the country to 
the Philippines, which I would think would have a major impact 
on their dollar per hour charge of Promontory, and I would like 
information on that later, too.
    But how does a firm with so little capacity--and my 
understanding is Promontory was probably the largest, but 
certainly a large chunk of the $2 billion--how does a firm with 
so little capacity acting in an area that is outside their 
traditional expertise--Blinder's words--how does it wind up 
with the most responsibility under this process? What does 
OCC--what is the process of OCC to take a firm that this is not 
in their sweet spot and award them contracts, arrangements, 
that go into the hundreds and hundreds and hundreds of millions 
of dollars?
    Mr. Stipano. Well, I would start by just saying the entire 
IFR process was unprecedented, unlike any situation we had ever 
encountered before. I think one reason why we put in our 
Consent Orders that it had to be done in 120 days is that we, 
perhaps naively, looked at it as a file review and we direct 
banks all the time to hire consultants to do a file review. 
This proved to be much more than that.
    I am not intimately involved in the details of Promontory's 
engagement, and I cannot really speak to that. I do know that 
they hired--they themselves hired large numbers of 
consultants--or consultants, contractors--to assist in their 
portion of the IFR. And given the enormity of the task, that 
does not seem inappropriate.
    Senator Brown. Thank you.
    Senator Warren, I have done a second round. You can sort of 
take two rounds at once. I think probably the vote will be 
called, so why do you not proceed as long as we can go until 
the vote is called.
    Senator Warren. Thank you very much, Mr. Chairman.
    I apologize for having to leave. I had the distinct honor, 
though, of being able to introduce Gina McCarthy for her 
hearing to head up the Environmental Protection Agency. She is 
a proud daughter of Massachusetts and so I wanted to be there 
to be able to do it.
    So I want to turn to another aspect of the Independent 
Foreclosure Review. Earlier this year, your agencies entered 
into a settlement with the mortgage servicers based on their 
foreclosure practices and the settlement was for about $9 
billion. And at that time, your agency said that they achieved 
this number, arrived at this number, based at least in part on 
the fact that servicers had made mistakes or broken the law in 
about 6.5 percent of the cases.
    Now, I assume if you had believed that the banks had broken 
the law in 90 percent of the cases, that you would have settled 
for a much larger amount of money and that the homeowners would 
have been paid more, and that if you had found that they broke 
the law in only 1 percent of the cases, that you would have 
settled for less money and the homeowners would have been paid 
less. Is that basically right, Mr. Ashton?
    Mr. Ashton. Senator, at the time the Board accepted the 
settlement with the servicers, we had some preliminary error 
data. It was preliminary. We also had other data available----
    Senator Warren. Oh, I understand that.
    Mr. Ashton.----and it was only one of the factors that we 
took into account in deciding whether----
    Senator Warren. I understand. But the question I am asking 
is if you had believed at the time you were putting the 
settlement together that, in fact, the banks had broken the law 
in more than 90 percent of the cases, presumably, you would 
have settled for a lot more money, is that right?
    Mr. Ashton. I think that the error rate was a factor. It 
was not the only factor.
    Senator Warren. OK. It is the only factor [sic], but it 
certainly would have mattered if you thought that the banks 
broke the law 90 percent of the time as opposed to, say, 6.5 
percent of the time.
    Mr. Ashton. That is true, but there were other factors that 
led the Board to accept the settlement, especially the delay 
that would have been involved----
    Senator Warren. Fair enough. I understand the delay. But it 
matters how many homeowners were the victims of illegal 
practices by the banks in terms of determining the settlement 
amount, does it not?
    Mr. Ashton. The approach that was taken in the settlement 
agreement is focused on trying to get cash to the borrowers as 
quickly as possible.
    Senator Warren. But the question is not getting cash to 
them, $300. The question is getting the right amount of cash to 
the right people, the people who are the victims of illegal 
activities of the banks, is that right?
    Mr. Ashton. The settlement agreement is not based on 
findings of individual injury. It is a different approach. We 
gave up looking for individual injury and decided----
    Senator Warren. So, I read your press release at the time 
that this came out, and you said one of the things that your 
agency and the Federal Reserve said is that the banks had 
broken the law or made errors in approximately 6.5 percent of 
the cases. And my question is, if you had found that they had 
broken the law in 90 percent of the cases, would you have 
demanded more money from the banks?
    Mr. Ashton. It would have been a factor, I believe, but----
    Senator Warren. I will take that, then, as a ``yes,'' 
because what I take it to mean, since you used it in your press 
release and since it is relevant to how much money the people 
who have been injured are going to get, that the number is 
critical. It tells us how much illegal activity there was and 
how much the banks should pay.
    The problem is that the 6.5 percent is not accurate. Your 
staff admitted to us in a meeting earlier this week that the 
number is not based on a random sample, not on a review of 
these cases. It was determined based on whatever files had been 
reviewed by the time you shut down this process.
    And then it gets worse on the numbers. A week after 
announcing--a few weeks after announcing the settlement, your 
agency revised the 6.5 percent number down to 4.2 percent. The 
Wall Street Journal reported that the error rate, that is, the 
rate of breaking the law, was--or making mistakes--was 11 
percent at Wells Fargo, 9 percent at Bank of America, and there 
are reports that the error rate at JPMorgan Chase was only six-
tenths of 1 percent. In other words, the 6.5 percent number was 
just a made-up number.
    So Congressman Cummings and I have asked for information 
about how you came up with the number. We still do not have 
enough facts to check it. But the question I have is, what is 
the right number? Is it six-tenths of 1 percent? Is it 6.5 
percent? Nine percent? Eleven percent? Twenty percent? Fifty 
percent? Ninety percent?
    If you cannot correctly tell how many people were the 
victims of illegal bank actions, how can you possibly decide 
how much money is an appropriate amount for settlement?
    Mr. Ashton. Senator, I can only reiterate that the decision 
that was made to accept the agreement, and we recognize that 
that was not a perfect option, was based on the delay that 
would have been involved in any alternative to continue the 
Independent Foreclosure Review.
    Senator Warren. Mr. Ashton, I am sorry. I understand the 
point about delay, but it does not mean you pick a number out 
of the air. The number has to be based on at least some 
understanding of how often the banks engaged in illegal 
activity and how many homeowners got hurt. And you needed some 
way to estimate that to come up with a number. Is that not 
right?
    Mr. Ashton. To estimate the number with more precision 
would have required additional delay in providing payments, and 
so the decision was made not to go down that course, not to 
continue the Independent Foreclosure Review, which we could 
have done, and instead to accept a settlement which resulted in 
payments to borrowers in a much quicker timeframe.
    Senator Warren. Mr. Ashton, I cannot believe that you are 
saying that the only reason the number $9 billion was settled 
on was so that it could be done quickly, and that you are 
saying that the OCC did not have an estimate in mind of how 
many banks had broken the law and how many homeowners were the 
victims of illegal activities.
    Mr. Stipano, is that the case for the Federal Reserve Bank, 
as well?
    Mr. Stipano. Senator, I am not an expert on the IFR 
settlement. I was not directly involved in it. I can answer 
general questions, and I will do my best to do that.
    My understanding is that, when it comes to the error rate--
I do not really know how it was calculated, to be honest. There 
are people in the agency who do. They are not here. I do 
believe that we did review a substantial number of files----
    Senator Warren. I am sorry. Mr. Stipano, we met with your 
staff.
    Mr. Stipano. Yes.
    Senator Warren. And your staff has made clear you did not 
review a random sample.
    Mr. Stipano. No, it was not a random sample----
    Senator Warren. And without a random sample----
    Mr. Stipano. No----
    Senator Warren.----can you then generalize to the accurate 
number, even an estimate, of how many banks broke the law?
    Mr. Stipano. Not--my understanding is not in a 
statistically valid way. However----
    Senator Warren. OK. That is no.
    Mr. Stipano. But can I finish, though. I do think that the 
review of 100,000 files plus is not valueless. I mean, it does 
inform your decision to some extent.
    Senator Warren. So you are telling me it is not a random 
sample, but you think you know something.
    Mr. Stipano. It has some value. That is a fact.
    Senator Warren. And what is it that you know, since we have 
seen different numbers reported----
    Mr. Stipano. I am assuming that is where the error rate 
came from, but I am only assuming, Senator. I was not involved 
in----
    Senator Warren. So if we are to draw an inference from 
those 100,000 files, it seems to me we need more information 
about the 100,000 files, that is, how they were drawn and how 
much illegal activity was found in those files. Is that 
accurate?
    Mr. Stipano. I think that is accurate.
    Senator Warren. So far, you have not given us that 
information.
    Mr. Stipano. Yes. As I stated earlier, Senator, there are 
processes for us to provide confidential supervisory 
information to Congress in its oversight capacity and we are 
prepared to follow those processes.
    Senator Warren. So let me just make sure I understand this 
completely. I want to know on a bank-by-bank basis the number 
of families that were illegally foreclosed on. Will you give me 
that information?
    Mr. Stipano. Eventually, we are going to issue a statement 
to the public where we provide additional information, but if 
we go through the processes that I described previously, we can 
share it to Congress in its oversight capacity.
    Senator Warren. So you are saying you will make that 
information publicly available?
    Mr. Stipano. I did not say that. I said that we are 
planning on issuing a public statement that wraps up the IFR 
that provides additional information----
    Senator Warren. That is not what I am asking for.
    Mr. Stipano. Yes.
    Senator Warren. What I am asking for is a bank-by-bank 
analysis of how many families they illegally foreclosed on. 
Will you give us that information?
    Mr. Stipano. We can provide that to Congress in its 
oversight capacity if we go through the normal processes that 
we are prepared to follow.
    Senator Warren. And why are you not making that public? I 
just want to make sure I understand.
    Mr. Stipano. I do not know that there has been a decision 
not to. I think that we are still evaluating----
    Senator Warren. Are you claiming----
    Mr. Stipano.----what we are going to release publicly.
    Senator Warren. Are you claiming that the information about 
illegal activity is privileged and confidential?
    Mr. Stipano. It is all confidential supervisory 
information, but that does not mean that we will not at some 
point release some of that information. That decision just has 
not been made at this point.
    Senator Warren. So you are saying, when you find evidence 
of illegal activities----
    Mr. Stipano. Yes.
    Senator Warren.----by the banks----
    Mr. Stipano. Yes.
    Senator Warren.----when they have illegally foreclosed-----
    Mr. Stipano. Yes.
    Senator Warren.----against homeowners, that that 
information is privileged and you will not release it without a 
letter from Congress.
    Mr. Stipano. If it is derived from the bank examination 
process, yes, it is----
    Senator Warren. How else would you get it?
    Mr. Stipano. Well, sometimes you get information through 
third parties, through outside sources. But in this case, that 
is not the case.
    Senator Warren. So unless someone throws a rock through the 
window with this information tied to it, you will not release 
it, is that what you are saying?
    Mr. Stipano. To the extent that the information is 
confidential supervisory information derived from the exam 
process, it is subject to privilege. We do not ordinarily make 
that public. However, in this case, we do plan on making public 
issuances describing further findings and further analysis of 
the process.
    Senator Warren. On a bank-by-bank basis of illegal 
activity?
    Mr. Stipano. I do not know if that has been determined yet.
    Senator Warren. All right. So let me ask it from the other 
point of view. You now have evidence in your files of illegal 
activity, I take it, for some of these banks. I get that from 
the evidence you have released about the charts, who is going 
to get paid what. So if someone believes that they have been 
illegally foreclosed against, will they still have a right 
under this settlement to bring a lawsuit against the bank?
    Mr. Stipano. Yes.
    Senator Warren. All right. Now, if a family wants to bring 
a lawsuit--you are both lawyers--would it be helpful, if you 
are going against one of these big banks, would it be helpful 
for these families to have the information about their case 
that is in your files? Mr. Ashton?
    Mr. Ashton. It would be helpful to have information related 
to the injury. Yes, it would.
    Senator Warren. OK. So do you plan to give the families 
this information? That is, those families that have been 
victims of illegal foreclosures, will you be giving them the 
information that is in your possession about how the banks 
illegally foreclosed against them? Mr. Ashton?
    Mr. Ashton. That is a decision that we are still 
considering. We have not made a final decision yet.
    Senator Warren. So you have made a decision to protect the 
banks but not a decision to tell the families who were 
illegally foreclosed against?
    Mr. Ashton. We have not made a decision about what 
information we would provide to individuals.
    Senator Warren. Mr. Stipano?
    Mr. Stipano. We are in the same position.
    Senator Warren. So I want to just make sure I get this 
straight. Families get pennies on the dollar in this settlement 
for having been the victims of illegal activities or mistakes 
in the banks' activities. You let the banks, and you now know 
individual cases where the banks violated the law and you are 
not going to tell the homeowners, or at least it is not clear 
yet whether or not you are going to do that?
    Mr. Stipano. We have not made a decision on what we are 
going to tell the homeowners.
    Senator Warren. You know, I just have to say, I thought 
this was about transparency. That is what this is all about. 
People want to know that their regulators are watching out for 
the American public, not for the banks. And the only way that 
we can evaluate whether or not you are doing your job is if you 
make some of this information publicly available. And so far, 
you are not doing that. And without transparency, we cannot 
have any confidence, either in your oversight or that the 
markets are functioning properly at all, and that people are 
going to receive proper compensation for what went wrong.
    So do we have time for another round of questions?
    Senator Brown. We do not. We do not.
    Senator Warren. OK. I----
    Senator Brown. The vote started about 8 minutes ago.
    Senator Warren. All right.
    Senator Brown. Thank you, Senator Warren.
    I think her points are very well taken. I think back to 
Attorney General Holder's comments about that, in response to 
Senator Grassley's and my letters asking when he--the 
Department of Justice said that they were concerned about 
prosecution because of the--he did not quite use the words 
fragility of the financial system, but that it could have 
repercussions, and I think this is along those same lines, that 
the public--and the public over and over seems to think that 
this institution and the regulators and the Senate and the 
House are more interested in protecting the banks than they are 
the public. I think Senator Warren's comments speak to that. I 
think the back and forth between the Department of Justice and 
our office speaks to that. And I am hopeful that this starts a 
new era in transparency and in helping those families that have 
been wronged.
    The vote is about 10 minutes in. We will recess and I thank 
the first panel for joining us. There will be follow-up from 
Senator Warren, I am sure, and Senator Reed and me to the two 
of you, but you are dismissed and we will call up the second 
panel within about 15 minutes.
    So we stand in recess.
    [Recess.]
    Senator Brown. The Subcommittee will come to order.
    Thank you for your patience, and thank you especially to 
the second panel for waiting around while Senator Warren and I 
voted. I will introduce the next panel and then we will proceed 
with questions.
    Konrad Alt is the leader of Promontory's San Francisco 
Office, where he advises clients on compliance, enterprise risk 
management, governance, and regulatory communications, and 
particular expertise in retail lending. He is a former counsel 
to this Committee. He served as Senior Deputy Controller for 
Economic Analysis and Public Affairs at the Office of the 
Comptroller of the Currency.
    James Flanagan is the U.S. Leader of the 
PricewaterhouseCoopers Financial Services Practice, where his 
responsibilities include the banking and capital markets, 
insurance, and asset management sectors. He is actively 
involved with PricewaterhouseCoopers' Global Financial Services 
Leadership Team, as well as U.S. firms' Audit Leadership Team.
    Owen Ryan heads Advisory Practice at Deloitte and Touche. 
He has experience in areas that include capital markets, 
mergers and acquisitions, corporate finance, strategic 
consulting, auditing, tax, and practice management. He serves 
on both the Deloitte Board of Directors and Executive 
Committee.
    Mr. Alt, if you would. Try to keep it close to 5 minutes, 
each of you, and I very much appreciate all three of you 
joining us, all of you. Thank you.

    STATEMENT OF KONRAD ALT, MANAGING DIRECTOR, PROMONTORY 
                      FINANCIAL GROUP, LLC

    Mr. Alt. Thank you, Mr. Chairman. Good morning, Senator 
Warren.
    So Promontory Financial Group's core business is helping 
financial institutions understand how to meet their business 
challenges consistent with regulatory expectations. Clients 
come to us for help in strengthening their risk management or 
corporate governance, and frequently, they want an independent 
assessment. Our work runs from testing risk models to running 
stress tests to reviewing board performance. We can recommend 
improvements to strengthen corporate governance or risk 
management, bolster capital and liquidity, or better protect 
consumers.
    Promontory Financial Group is not a regulator. We do not 
and cannot perform regulatory activities. We do not make 
regulations. We do not issue guidance. We do not assign 
examination ratings. And we do not bring enforcement actions. 
These activities are the domain of public officials, 
accountable through Congress to the American people. Private 
consultants can only make recommendations, even when acting as 
an independent consultant pursuant to a regulatory order.
    Expertise, experience, and integrity have been fundamental 
to our success. Many of our senior professionals have spent 
decades working in this area. They know the laws and 
regulations and they believe in them.
    Independent judgment is central to all of our engagements, 
whether or not we are formally designated as independent. Our 
expertise is in identifying issues and solutions. We have to 
have the integrity to deliver bad news to top management and 
the board.
    In several dozen engagements, regulatory agencies have 
formally designated Promontory Financial Group to serve as an 
independent consultant pursuant to a regulatory enforcement 
action. These engagements have involved over a dozen different 
regulatory and law enforcement authorities, both in the U.S. 
and abroad, and a variety of different types of reviews. We 
believe these assignments fit well with the strengths of our 
firm and we believe we have handled them well. But as a 
percentage of our total number of engagements, they have been a 
small portion of our practice.
    We believe the most important qualifications for an 
independent consultant are subject matter expertise and 
integrity. Expertise is fundamental, but a consultant who lacks 
the integrity to deliver a tough message will probably fail to 
clearly define the problem and the solution.
    The nature of regulatory oversight in our independent 
consulting assignments varies. In a small project, it might 
consist of presenting our final report to an examination team. 
A larger complex assignment might entail more extensive 
oversight, including regular status reports and sign-offs and 
validation of our results.
    Regulators use these techniques to establish and maintain 
transparency so that they can quickly address any concerns that 
might arise during our review. We support that approach. Both 
with the regulator and with the financial institution, we want 
to avoid surprises and build confidence that our review will 
identify and address the issues.
    Conflicts of interest have the potential to compromise the 
quality of an independent review or to diminish confidence in 
its results. Managing those conflicts is, therefore, important 
to our work, as it is to the work of all reputable professional 
services firms. Sometimes prior work will completely preclude 
us from taking on an independent review. More frequently, the 
question is whether we can establish appropriate ethical 
safeguards to ensure that past relationships do not compromise 
our independence. We work through those issues in consultation 
with both the regulator and the institution involved. 
Ultimately, of course, it is the regulator's decision whether 
we are suited for an independent consulting assignment.
    Your invitation asked about our legal obligations to the 
regulated financial institution and the regulator in an 
independent review. Our legal obligations are set out in our 
engagement letters. Regulatory authorities often review and 
approve those letters and frequently require specific language 
relating to independence.
    Finally, your invitation letter asked how we ensure quality 
and consistency in providing oversight to financial 
institutions. As I have said, we are not regulators and we are 
not in the business of providing regulatory oversight. But 
quality and consistency matter to us and we pursue them by 
hiring top-quality, experienced experts and giving them great 
support. In this way, we have built what we believe is the 
world's leading consultancy in our field.
    In summary, the use of private sector resources to support 
the activities of Federal regulators raises legitimate public 
policy questions. We applaud this Subcommittee's interest in 
seeking assurance that the firms enlisted in such roles can 
pursue the public interest without compromise.
    Thank you, Mr. Chairman.
    Senator Brown. Thank you, Mr. Alt.
    Mr. Flanagan, thank you for joining us.

STATEMENT OF JAMES F. FLANAGAN, LEADER, U.S. FINANCIAL SERVICES 
              PRACTICE, PRICEWATERHOUSECOOPERS LLP

    Mr. Flanagan. Thank you. Thank you, Chairman Brown, thank 
you, Senator Warren, for the opportunity to appear today on 
behalf of PwC.
    I lead PwC's Financial Services Practice, which means I 
help to manage and oversee the firm's diverse businesses in 
banking capital markets, insurance, and our asset management 
sectors. We are a partnership of over 37,000 professionals in 
the U.S. and 180,000 globally. Together, we provide 
professional services to public and private companies, the 
Federal Government, State and local governments, and 
individuals. The foundation of our brand is the quality of our 
services, which are built on integrity, objectivity, and 
professionalism.
    PwC's Financial Services Practice offers clients audit, 
tax, and consulting services. We understand that this 
Subcommittee has expressed particular interest in the role of 
independent consultants in relation to Agency Enforcement 
Orders. The vast majority of our consulting engagements do not 
arise from Agency Enforcement Orders, but from time to time, we 
do Enforcement Order-related work and I would be happy to give 
the Subcommittee a flavor of our views about such engagements 
based on our experiences.
    Independent consultants are often retained in enforcement-
related matters because of the independent consultants' 
specialized expertise or because in larger complex cases 
independent consultants can provide the scale of assistance and 
review beyond that that the institutions or the regulatory 
agency can or would like to deploy, given other needs and 
obligations.
    The particular nature of a regulatory proceeding and final 
order in an enforcement action will define the qualifications 
necessary for an independent consultant. There are, however, 
certain baseline expectations for any independent consultant: 
Appropriate subject matter expertise and experience, a 
reputation for integrity, objectivity, and impartiality, 
significant experience managing projects of the size or 
complexity at issue, and sufficient trained and dedicated 
professionals to perform the quality work in a prompt and cost 
effective manner.
    The Independent Foreclosure Reviews, or IFRs, are a recent 
example of work with companies who are subject to regulatory 
enforcement proceedings. As the Subcommittee knows, we were 
engaged by four mortgage servicers to act as their independent 
consultants under the terms of their respective settlements 
with the Fed and the OCC. According to the terms of the Fed and 
the OCC Consent Orders, as elaborated in our engagement 
letters, which were reviewed and approved by the regulators, we 
were engaged to identify errors related to the foreclosure 
proceedings in 2009 and 2010, regardless of whether they were 
financially harmed borrowers, but also to identify which errors 
resulted in financial harm to borrowers.
    The scale of the IFR engagements was unprecedented. As the 
GAO said in its report last week, the IFR engagements required 
application of hundreds of procedures to thousands of loan 
files to test for potential errors in dozens of categories. 
Over the course of the engagement, the scope and the procedures 
underlying PwC's work continued to evolve. As they learned more 
about the servicer files, the regulators provided updated 
guidance and instruction on the scope and content of PwC's 
testing. Independent legal counsel engaged by the servicers 
pursuant to the orders provided new iterations of guidance as 
the reviews proceeded to address the challenges of evaluating 
the servicers' compliance with the laws of more than 50 
relevant Federal and State jurisdictions.
    While the complexity and scale of the IFR engagements posed 
challenges to the independent consultants, we are proud of our 
work. This is because, on the IFR engagements, we performed our 
file reviews and made our observations objectively and 
impartially. Our teams were comprised of experienced, talented, 
and well trained PwC professionals. We cooperated fully with 
the regulators and followed their guidance, and we endeavored 
to communicate transparently and on a regular basis with the 
regulators who were overseeing and monitoring our work.
    We appreciate your time and consideration of our 
perspectives and I thank you for the opportunity to appear 
before you and I look forward to answering your questions.
    Senator Brown. Thank you, Mr. Flanagan.
    Mr. Ryan, thank you for joining us. Welcome.

  STATEMENT OF OWEN RYAN, PARTNER, AUDIT AND ENTERPRISE RISK 
               SERVICES, DELOITTE AND TOUCHE LLP

    Mr. Ryan. Chairman Brown, other Members of the 
Subcommittee, good morning. My name is Owen Ryan and I lead the 
Advisory Practice at Deloitte and Touche LLP.
    Our Advisory Practice offers a wide range of services to 
clients in most major industries. Our services include cyber 
security and privacy, governance, regulatory, and risk 
management, finance operations and controls transformation, 
financial accounting and valuation, internal auditing, and 
mergers and acquisitions. I am a Certified Public Accountant 
and have more than 28 years of professional experience. I serve 
on both the Deloitte and Touche LLP Board of Directors and its 
Executive Committee.
    In your invitation, you asked our firm to discuss our role 
as independent consultant for financial institutions and the 
role of independent consultants more generally. Before I do so, 
I would note that we served as the independent consultant on 
the Mortgage Foreclosure Review for JPMorgan Chase. My remarks, 
I believe, will be responsive to your invitation letter and 
generally be applicable to our Foreclosure Review engagement.
    I would also note that Deloitte is not a law firm, and, 
therefore, my testimony today is not based on legal analysis 
but is instead based on my professional experiences.
    Deloitte member firms employ more than 190,000 individuals 
globally, and the United States firms employ almost 60,000 
people. We provide professional services in four key areas: 
Audit, advisory, tax, and consulting. Our business framework 
allows us to provide a wide range of professional services 
based on the needs of our clients. While independent consulting 
engagements do not represent a substantial portion of our 
business, I can assure you that we take our role seriously. We 
strive to fulfill our professional obligations to provide 
independent, objective, and quality services consistent with 
the highest standards of our profession.
    Before accepting a role as independent consultant, our firm 
determines if we have the requisite experience, qualifications, 
and appropriate number of professionals to execute our 
responsibilities. Our professionals serving on these types of 
engagements generally have auditing, consulting, industry, or 
regulatory experience. Supplemental training on rules and 
regulations pertinent to each engagement may be necessary. In 
addition, it may be important for these professionals to have 
experience working on or handling large-scale complex and 
evolving engagements. We believe we were well qualified to 
serve as the independent consultant for the Foreclosure Review.
    We know from our experiences that it is important to 
maintain open communication and an appropriate working 
relationship amongst the independent consultants, the 
regulators, and the institutions being monitored. Frequently 
scheduled meetings and timely reporting are important 
mechanisms for communicating our approach and progress.
    Independent consultant engagements often result from 
regulatory directives. As such, these engagements are subject 
to the oversight of regulators as determined by their 
requirements. These requirements generally include regulatory 
approval of the independent consultant and the scope and 
methodology to be used.
    Given the relatively small number of firms with the scale 
and expertise required to serve as an independent consultant on 
large engagements, it is often the case that a firm will have 
some previous relationships with an institution. Our policies 
and procedures are designed to ensure that each engagement is 
approached with due professional care, objectivity, and 
integrity, consistent with American Institute of Certified 
Public Accountants consulting standards. These policies and 
procedures include disclosing to the regulator our previous 
relationships with the institution before accepting the 
engagement. Circumstances may also dictate the need for us to 
decline the engagement altogether.
    The engagement letter generally defines our professional 
obligations. As part of our engagement acceptance procedures, 
we would identify any regulatory considerations that are not 
within our purview and expertise as an independent consultant. 
To the extent we became aware of compliance issues outside the 
scope of our purview, we would obviously fulfill all reporting 
obligations to the regulator. Deloitte policies and procedures 
promote the delivery of consistent, high-quality services in 
our independent consultant engagements. Quality control and 
assurance are integral to the success of all of our engagements 
and we take care to build them into the design, execution, and 
review of our projects. We conduct mandatory training for our 
professionals and monitor the quality of our work on our 
independent consultant engagements.
    As a firm, we have been in business for over 100 years. We 
know that our reputation is our most important asset. As such, 
independence, integrity, and objectivity are of paramount 
importance to us. We take very seriously our professional 
obligations. We have an overriding commitment to excellence in 
everything we do.
    I thank you for providing me with this opportunity to 
testify and will be happy to answer any questions you have.
    Senator Brown. Thank you, Mr. Ryan. Thanks to the three of 
you.
    All of you were here for the prior panel and heard some of 
the questions that I want to ask. I want to fill in the blanks 
with some questions that were asked and fully answered or 
partially answered from the prior panel.
    Five consultants of the IFR are not here today. Three of 
you are. I want to ask each of you whether any of your 
organizations was given formal written notice from OCC of an 
opportunity to improve its performance.
    Mr. Alt?
    Mr. Alt. No, sir.
    Senator Brown. OK. Mr. Flanagan?
    Mr. Flanagan. No, sir.
    Senator Brown. And Mr. Ryan?
    Mr. Ryan. No, sir.
    Senator Brown. OK. Thank you for that. I like those ``yes'' 
or ``no'' quick answers. Thanks.
    I addressed the issue of compensation with the regulators. 
Did any of you--and I asked the question, did any of your firms 
notify regulators that they, you, had concerns about the rate 
at which your compensation was growing. We have, as I mentioned 
earlier, at least two firms said that--I am not going to 
disclose which two, but said that they initially thought $5 to 
$8 million would be the charge. Obviously, it grew much bigger 
than that.
    My question, as I said, is did any of you notify the 
regulators you had concerns about the rate at which your 
compensation was growing, far beyond those numbers?
    Mr. Alt. Senator, we discussed with the regulators on 
several occasions the cost of the review and the amount of 
resources required, and we instituted in consultation with them 
many efforts to improve the efficiency of the review. So they 
certainly were aware that this was a concern for us.
    Senator Brown. Did it surprise you, the size? The amount?
    Mr. Alt. Senator, we recognized from the very outset that 
this would be a very large and complex undertaking, that it 
would require a lot of resources over an extended period of 
time, and we clearly built that into our methodology and we 
communicated with the regulators about it. And we were also 
clear about the potential for changes in scope to increase the 
amount of resources. So we did--we anticipated--it was a large 
review right from the outset. It was a large review and we 
simply staffed up to handle it.
    Senator Brown. What did you first think when you saw the 
120-day standard, if that is a standard, the 120-day goal or 
deadline that they initially set?
    Mr. Alt. I am not----
    Senator Brown. Did you think that was attainable?
    Mr. Alt. No, Senator. I think it was pretty clear from the 
outset that that was not attainable and----
    Senator Brown. Did you tell them?
    Mr. Alt. I am sorry?
    Senator Brown. Did you tell OCC that?
    Mr. Alt. I believe they told me that.
    Senator Brown. That 120 was not attainable?
    Mr. Alt. I think, from the outset, what we heard from them 
was that our priority should be doing the job right and not to 
worry about the time table, and let them know if we needed an 
extension.
    Senator Brown. Mr. Flanagan, same sets of questions, if you 
would.
    Mr. Flanagan. Certainly.
    Senator Brown. Did you notify the regulators?
    Mr. Flanagan. Yes. So we had an ongoing dialogue with the 
regulators throughout the process, as they acknowledged in the 
first panel. So they were aware of the scope, the change in the 
findings as the process was playing out. So they were well 
aware throughout the evolution of the exercise and the level of 
effort that was being incurred.
    Senator Brown. What did you think when you saw the 120 
days?
    Mr. Flanagan. I guess I would say, at the outset, we did 
not really know what the process was going to be. So I do not 
think we started it saying there is no way we will be done in 
120 days. It became obvious very quickly that we would not, as 
the process played out.
    Senator Brown. Did the--and you talked to OCC about that 
early?
    Mr. Flanagan. Yes. We had, you know, regular meetings with 
the OCC and the Fed. Our teams met with them virtually daily to 
talk about what was going on in the field. There were weekly 
calls with larger groups from the OCC and the Fed. So there was 
a regular dialogue with them about the activities.
    Senator Brown. Mr. Ryan?
    Mr. Ryan. So, similarly--is it on? So, yes, we also let the 
regulators know about the change in scope, and, in fact, by the 
time our engagement letter was formally signed, the estimate of 
our professional fees was commensurate with where we ended the 
project.
    Senator Brown. Mr. Alt and Mr. Flanagan--Mr. Ryan, I 
understand, cannot answer this, I accept that, because he had 
one bank. His firm had one bank that they worked with. The 
other two of you had at least three and also at least one of 
you, I know, did some subcontracting, were both a subcontractor 
and subcontracted to others, which confuses me a bit, but would 
you disclose to us how much you were paid by OCC and how much 
you were paid by the banks, by your clients? Again, I am not 
asking Mr. Ryan because he would have to disclose his one bank, 
JPMorgan Chase. You had multiple clients. I am asking for the 
aggregate number. Would you disclose that to the Committee now, 
Mr. Alt?
    Mr. Alt. Senator, to be honest, I do not know the exact 
number that we were paid in total and I am under the 
impression, notwithstanding--well, maybe I could tell you the 
total if I had it. I do not think I can give you bank-specific 
information, consistent with the information that I have 
received, or the direction that I have received from the OCC.
    Senator Brown. Would you be willing to notify the Committee 
early next week on that final figure, that total figure?
    Mr. Alt. We could obtain the total figure for you, yes.
    Senator Brown. OK. Good. We would appreciate that early 
next week.
    Mr. Flanagan, would you be willing to disclose that today?
    Mr. Flanagan. Yes, I would.
    Senator Brown. And it is----
    Mr. Flanagan. We had a conversation with our counsel coming 
into today's hearing because of the interest in the topic and 
our counsel discussed with the servicers' counsel, as well, to 
allow us to disclose the fees associated with the individual 
banks, as well.
    So the answer to your question is, for U.S. Bank, our fees 
were approximately $190 million. For Citibank, our fees were 
approximately $175 million. And for SunTrust Bank, our fees 
were approximately $60 million.
    Senator Brown. Six-O?
    Mr. Flanagan. Six-O.
    Senator Brown. OK. Thank you. Mr. Ryan, that does not make 
you get an urge to disclose JPMorgan Chase, I presume?
    [Laughter.]
    Senator Brown. You are free to, if you would like, but I 
understand the agreement was you would not have to.
    Mr. Ryan. So what I would say is, based on the testimony 
this morning, if we can get approval from the OCC to disclose 
that to you, then we would not be adverse to disclosing that to 
you. So we will do that after the meeting if we receive 
approval.
    Senator Brown. Thank you very much for that.
    Two of you note in your testimony, Mr. Flanagan and Mr. 
Ryan, that your auditing firms must adhere to independent 
standards set by the American Institute of Certified Public 
Accountants. What is ironic here is--maybe it is not ironic. 
What is illustrative, perhaps, is that the private sector trade 
association, the professional association AICPA, has very 
specific, strict standards on behavior and qualifications and 
all that. Apparently, the OCC does not and at least as of an 
hour ago had not yet started writing sort of their prescriptive 
direction here.
    To Mr. Ryan and Mr. Flanagan, does that put you and your 
firms at some disadvantages to your competitors in following 
those rules?
    Mr. Flanagan. I will take that first. We are bound by the 
AICPA standards, but we believe we hold ourselves to those 
standards or higher. I go back to my earlier comments. I mean, 
our brand is defined by the way we execute our work, the 
objectivity, the independence that we bring. And so the AICPA 
standards are good and helpful in giving us a guideline, but 
ultimately, we believe that we have to demonstrate that in a 
market and stay true to our brand.
    Senator Brown. Mr. Ryan.
    Mr. Ryan. I do not believe that our adhering to our 
professional standards puts us at a competitive disadvantage. 
In fact, I believe it enhances our competitive advantage 
because the regulators and institutions that have to go through 
consent orders and things of that nature understand that we 
will exercise our responsibilities with due professional care, 
with objectivity, and with the integrity that everyone would 
expect.
    Senator Brown. Did it surprise you, the answer from Mr. 
Stipano earlier today from OCC, surprise you when he said that 
they had not written standards in judging who could be 
consultants with these banks? Let me ask the two of you, did 
that surprise you?
    Mr. Ryan. Well, I will go. We are going to alternate going 
first and second here. I do not know that it surprised me, per 
se. I do know that they ask us to provide a lot of information 
prior to our retention and it is thorough, their request. And, 
obviously, we try to provide them everything that we can to be 
responsive. And so it would seem like they have the same 
information that we would be using to make our own 
determination, because we would not proceed with an engagement 
if we did not think we would be appropriately objective. And so 
I guess it was surprising that there might not be a formal 
policy written, but I would imagine when they go into their 
room to have a conversation, that they are thinking the same 
things that we would be thinking about.
    Mr. Flanagan. I would say I had not considered whether they 
had a formal policy in place as they went through the process. 
I can tell you that as they vetted us before being allowed to 
be appointed for our four servicers, there were many questions 
asked of us about the nature of the assignments and the work we 
had done with the financial institutions that we were being 
asked to do the IFR work for. But I was not aware that they 
had--did not have a specific policy in place.
    Senator Brown. OK. I have other questions along the same 
lines of qualifications and standards, but I have gone 5 
minutes over my time. Let me go to Senator Warren. Then we will 
do one more round of questions after she is complete with her 
seven or 8 minutes. Go for it.
    Senator Warren. Thank you very much, Mr. Chairman.
    You know, I am going to ask you some questions about 
numbers and how this review was designed, but I never want to 
forget in this that the particular instance we are talking 
about here involved four million families, and it involved 
people who lost their homes, whose lives were turned upside 
down, people who did not sleep, people who had to tell their 
children that they were going to have to change schools. This 
is a terrible process that we have gone through.
    And the whole point of this review was to bring some 
justice, to give these families some compensation for what 
happened, to try to help them, but also to identify the 
wrongdoing and hold the financial institutions that broke the 
law accountable. So that was the whole idea behind this.
    And now the OCC and the Federal Reserve have announced a 
settlement, and the OCC has described this as it is based, at 
least in part, on a 6.5 percent error rate. I think I said 
earlier it was in their press release. I think that actually 
was a statement from the head of the OCC.
    But that means this is all the families are going to get 
from the regulators who were supposed to be looking out for 
them, the regulators who were supposed to be watching that this 
never happened in the first place, and the regulators who were 
supposed to conduct the investigation afterwards to make sure 
that these families were taken care of and that the banks were 
held accountable.
    So the questions I have are around how accurate the OCC and 
Federal Reserve settlement is. Does it really identify the law 
breaking that went on and appropriately hold these banks 
accountable? So I am really asking the question, have the 
families been protected or have the banks been protected?
    So I want to go back to one that I asked in the first 
panel, just to make sure I have got this right, and that is, I 
understand that you looked at about 100,000 files of the 
700,000 or so that were initially collected for you. That is a 
subset of the four million families for which the review was 
designated. So you looked at about 13 percent of the files that 
came to you, about 2 percent of the overall. And as I 
understand it, you just looked at the files as they came to 
you.
    So I just want to ask this question again. Mr. Alt, did you 
look at a random sample so that you could draw an inference 
about what had happened to all four million people?
    Mr. Alt. Senator, our sampling methodology was designed to 
include extensive random sampling and we were seeking to obtain 
results at a high level of statistical confidence.
    Senator Warren. That is right. And so when the work that 
you were doing was halted, had you completed a random sample of 
the four million families who were under review?
    Mr. Alt. No, Senator, we had not.
    Senator Warren. All right. And I understand that you were 
not the ones who halted this process, that the OCC and the Fed 
halted this process. But I want to be clear about that. Does 
that mean, then, that what you found tells us whether or not 
the illegal practices of the banks occurred in 1 percent of the 
cases or occurred in 90 percent of the cases?
    Mr. Alt. Senator, we were not in a position to conclude 
that based on the results at the time of the settlement.
    Senator Warren. All right. Thank you for clearing that up, 
Mr. Alt. I appreciate it.
    I have another question, again, about what you were asked 
to do by the Federal Reserve and the OCC. Whenever something--
you have to code these cases, basically. You have got to read 
these cases--I know they were very complicated--and, in fact, 
decide what box they belong in. Was there illegal activity? Did 
it cause someone to lose a home? No illegal activity, that sort 
of thing, all the way through. And it is a fairly complicated 
process.
    So it is pretty standard when you are putting something 
together like this that you worry about whether or not the 
person doing the evaluation gets it right. Your judgment call 
might be different from his judgment call. Shoot, you might 
have a lazy examiner, right, who says, yeah, it is all just 
great, and passes them all through.
    So the way we deal with that is you take some number of 
those cases and they are slotted in to be coded a second time 
and then there is a comparison between the first time and the 
second time and you figure out what the error rate is that your 
own evaluators are putting into it.
    So the first question I have is what did the OCC and the 
Fed require of you in terms of this sort of double-coding to 
figure out the error rate? Mr. Alt?
    Mr. Alt. Senator, we built in processes exactly as you 
describe into our methodology and we presented them to the OCC, 
and I infer that they were satisfied because they accepted 
them. But that was not their express requirement. Perhaps they 
would have required it if we had not built them in ourselves.
    Senator Warren. That is all right. So what was your rate of 
double-coding?
    Mr. Alt. I do not know that I could give you an overall 
rate. We could perhaps obtain that. It----
    Senator Warren. So, let me ask it a different way. What was 
your error rate?
    Mr. Alt. It changed over time and it depended on which 
files we were looking at. There were--I mean, we were reporting 
error rates to ourselves weekly, so we monitored that all the 
time.
    Senator Warren. Can you give me an idea of what your error 
rate was?
    Mr. Alt. Uh----
    Senator Warren. What was the range?
    Mr. Alt. Senator, I really--I do not think I could do that 
off the top of my head. I would have to go and perform that 
research. I would be happy to look into it for you.
    Senator Warren. All right. And was the error rate coming 
down over time?
    Mr. Alt. I believe it was, yes.
    Senator Warren. All right. So I would like to know about 
the error rate.
    Mr. Flanagan, the same question for you.
    Mr. Flanagan. So, specific to the error rate, unlike the 
prior comments about being able to disclose to you the fee 
information, the error rate information, we believe we are not 
allowed to disclose at this point in time by the terms of the 
engagement letters that we have signed.
    Senator Warren. You cannot tell me whether you had an error 
rate of 1 percent or 90 percent?
    Mr. Flanagan. That is my understanding, is that at this 
point, we are not able to do that.
    Senator Warren. Mr. Ryan?
    Mr. Ryan. We are under the same confidentiality provisions. 
What I will tell you is that the error rate that has been 
reported in the media for our work is mischaracterized.
    Senator Warren. All right. I think I will stop there, Mr. 
Chairman, since it is clear that we do not have the information 
we need to determine the numbers on which the OCC has based--
and the Fed--has based this settlement. Thank you.
    Senator Brown. Thank you, Senator Warren. We will do a 
second round.
    Let me go back to the standards. The GAO's report on the 
Independent Foreclosure says, clearly, the lack of common 
criteria--their term, common criteria--I guess that would be a 
synonym of standards--but the lack of common criteria increased 
the likelihood of inconsistent outcomes, and we have seen the 
mess that this has created. Would you each support more 
consistent standards for consultants' engagement, including a 
description of qualifications and independence? Mr. Alt?
    Mr. Alt. I suppose I would want to know exactly what the 
standard is, but we certainly support having standards in place 
and qualified independent consultants and so forth. Yes.
    Senator Brown. Mr. Flanagan?
    Mr. Flanagan. I think it would be a helpful--I mean, as was 
commented on in the earlier panel, to take the learnings from 
this exercise and determine what additional standards might be 
put in place.
    Senator Brown. Mr. Ryan?
    Mr. Ryan. I think the insights that were in the GAO report 
were very helpful and informative, and hopefully, those lessons 
will be learned going forward.
    Senator Brown. OK. I want to ask you a question I asked the 
regulators about qualifications. If a consulting firm has been, 
repeatedly been, for lack of a better term, at the scene of the 
crime, what would it take before they are viewed as not 
qualified? How would you answer that? I will start this time 
with you, Mr. Ryan.
    Mr. Ryan. I am sorry. Could you repeat the question, 
please?
    Senator Brown. If a consulting firm has repeatedly been at 
the scene of a crime, what would it take before they are viewed 
as not qualified?
    Mr. Ryan. I am not sure exactly what you are referring to, 
at the scene of the crime----
    Senator Brown. Well, I will give you a couple of examples. 
One consulting firm aggressively undervalued an institution's 
money laundering transactions, yet was chosen by OCC to be one 
of the IFAR. So----
    Mr. Ryan. I believe that our firm would report everything 
that we had experiences with to the OCC to allow them to make 
any determination if they believed that we would be 
appropriately qualified or not, and if, for example, if we felt 
we were not appropriately qualified, we would recuse ourselves 
from providing those types of services if we thought there was 
something that we could not do professionally appropriate.
    Senator Brown. Mr. Flanagan?
    Mr. Flanagan. My thought is that we would not put ourselves 
in a position to judge at what point some would say, you should 
not use a firm. What we focus on is not putting ourselves in 
that position, to execute the work in a thorough, thoughtful, 
and objective way, and to not be in a spot where someone is 
questioning whether, in fact, such an action should occur to 
our firm.
    Senator Brown. Mr. Alt?
    Mr. Alt. Senator, I guess it would depend on whether you 
are present at the scene of the crime as a witness or a 
perpetrator or a detective, but we would certainly expect our 
prior experience to be taken into account, and if it was--if we 
did not perform well, we would expect that to be considered.
    Senator Brown. Thank you. I am still--I know there is a 
limited universe of people who have the expertise. I also 
understand some of you had to do a lot of new hiring. In the 
case of Mr. Alt, I think they were both a subcontractor and 
someone who subcontracted to someone else. But I guess when I 
look at the aggressive undervaluation of an institution's money 
laundering transaction, that another consulting firm watered 
down reports to regulators, I just wonder how we continue to do 
this.
    And fundamentally, I mean, the problem here that I do not 
think anybody has really gotten their arms around is that 
these--that you work for the banks. They pay you. But you are 
supposed to represent the public interest here. On the case 
of--and I do not want to go into this in more detail on the 
specific money laundering issue, but, I mean, that is sort of 
an example that your job is to help the Government get to the 
bottom of this, as Senator Warren suggests, and knowing these 
numbers and understanding this. At the same time, you are paid 
by the banks and that is--so almost--and that speaks to Senator 
Reed's comments. That is almost an automatic inherent conflict 
of interest.
    And then when you have got the banks--when you have got the 
other issues of past behavior, just for my last question, just 
talk that through to me, why this is a system that works. Why, 
when you have worked, every one of you, because of your size 
and generally good work, has worked for a number of these 
financial institutions, you will be asked again, you are 
supposed to represent the public interest but ultimately you 
are representing this private interest, the bank that hires 
you, how does that--why should the public think that is a good 
arrangement? How do I go back to Cleveland or Dayton and 
explain this is a good arrangement instead of something else 
that nobody has figured out perhaps yet? I will start, Mr. 
Flanagan, with you.
    Mr. Flanagan. Sure. So, let me go back to your beginning 
comments as it relates to the people that we use and what we 
execute, or what that relates to PwC. Over the course of the 
engagement, we probably had close to 3,000 people work on the 
varying assignments. There were 1,500 people that were working 
on this assignment at the time of its termination. They were 
all PwC people. They were trained by our firm. They were 
deployed by our firm. And they are still working in our firm 
today. So just to be clear, for the record, about the nature of 
the people we used--and I would suggest some confidence that 
people should take, then, in the objectivity that we applied in 
executing the work.
    As was mentioned in the earlier panel, the options in terms 
of bringing a firm like ours in and who was going to pay, it 
was either the servicers or the OCC and the Fed directly. In 
this example, the decision was made to have the fees go 
directly to the servicers and have them pay us.
    I can assure you, the approach we took was that we were 
going to do the job well and stay true to our firm, our brand 
and our objectives. That is the approach we were going to take. 
We have done that for 100-plus years and it has served us well, 
and we think that is the way the market should look at us and, 
in fact, why the OCC and the Fed in their earlier comments 
commented upon why firms like ours are important for them to be 
able to leverage.
    Senator Brown. Mr. Ryan?
    Mr. Ryan. So, a very similar answer in the sense that, 
first of all, we did not hire anyone additional to work on the 
Foreclosure Review. We had all the professionals within our 
firm. And, similarly, they are still all here with us and they 
have been trained appropriately.
    I think, importantly in the Foreclosure Review, we made it 
very clear that our client principally was the regulators. We 
let--made everyone on our team understand that. We communicated 
that numerous times to ensure that everyone knew that we had a 
responsibility to execute on behalf of the regulators who were 
trying to do their work on behalf of those borrowers who were 
harmed, similar to what Senator Warren described.
    And so I think we have done that very well, and I believe 
that our impartiality, our objectivity, really came through in 
the way we conducted our responsibilities. And all the feedback 
we received from the regulators are that they were satisfied 
with the work we were doing and how we were doing it.
    Senator Brown. Mr. Alt, and then putting a little bit 
different aspect to the question, one of your principals and 
founders, Alan Blinder, said this was not in your sweet spot. 
You hired a number of people, I understand, including, and 
correct me if I am wrong, a number of them were foreign 
nationals, I guess. There is nothing wrong with that, but I 
just--and you both subcontracted and were a subcontractor. If 
you would sort of explain that.
    Mr. Alt. Senator, a project of the scale and complexity of 
the Independent Foreclosure Review, I would submit, is not in 
anybody's sweet spot. But it was a large, complex review and we 
have done large, complex reviews before. It was a review with a 
subject matter in mortgage servicing and we have familiarity 
with that subject matter. We were confident that we could put 
together a team that could handle the review, and we believe 
that we did that and we believe we faithfully carried out the 
directions of the OCC at a high standard of professionalism, 
and, frankly, we are proud of the work that our teams did here.
    The question that you were asking about the conflict 
between being paid by the banks while working for the 
regulators, I think is an important question, and there is an 
inherent conflict there and you are right to focus on it. There 
are checks in a process like this to try and mitigate that 
conflict and make sure that it does not become problematic, in 
fact, and the primary check is the regulatory oversight.
    And in all of our work as an independent consultant, we are 
subject to close regulatory oversight. That was especially true 
in the foreclosure review. We met with the regulators 
constantly. They were aware of every aspect of our process. 
They had absolute transparency into our work papers. They could 
meet with our personnel at any time. They were onsite 
frequently. Every aspect of this review was subject to very 
close regulatory oversight, and I believe that was an effective 
check on our independence.
    Senator Brown. Thank you.
    Senator Warren.
    Senator Warren. Thank you.
    So, I just want to take a look at the Independent 
Foreclosure Review payment agreement details. I think you have 
probably all seen this one-page agreement that lists all of the 
things that the banks did wrong and then boxes for how many 
people fall into each category and how much money they are 
going to be paid. Is that right? Have you all seen this?
    Mr. Ryan. Yes.
    Senator Warren. And this was put out--who put this out? Mr. 
Flanagan?
    Mr. Flanagan. [Nodding head.]
    Senator Warren. I think this was put out by the OCC and the 
Federal Reserve, is that right----
    Mr. Ryan. Yes.
    Senator Warren.----as a part of the settlement details. So 
I just want to ask you about this. It has some pretty amazing 
categories here. The first category is about servicemembers who 
were protected by Federal law whose homes were unlawfully 
foreclosed. It has got people who were current on their 
payments whose homes were foreclosed. It has got people who 
were performing all of the requirements under a modification 
who lost their homes to foreclosure. And it tells how many 
people fall into each category and how much money the people in 
that category will receive. And it ultimately resolves what 
will happen to 3,949,896 families.
    So the question I have is, having resolved this nearly four 
million families, who put the people, the families, into each 
of these boxes? Is that what your firms did? Mr. Ryan?
    Mr. Ryan. No, Senator, we did not.
    Senator Warren. So who put them in?
    Mr. Ryan. Well, I am not sure how that schedule was 
prepared. I saw it for the first time yesterday.
    Senator Warren. Mr. Flanagan?
    Mr. Flanagan. Same response. We were not involved in the 
accumulation of that information.
    Senator Warren. Mr. Alt?
    Mr. Alt. Senator, I have seen this schedule, but I am not 
familiar with the basis for its preparation.
    Senator Warren. So let me understand this. You ran the 
Independent Reviews, right? That is what you got paid to do. 
And yet I presume the only one left is the banks must have put 
them in these boxes, and you made no independent review of 
their going into these boxes? You were not asked to do that? 
Mr. Alt?
    Mr. Alt. No, Senator, we were not asked to do that.
    Senator Warren. Mr. Flanagan?
    Mr. Flanagan. No, we were not.
    Senator Warren. Mr. Ryan?
    Mr. Ryan. We were not, Senator.
    Senator Warren. So that leaves us with the banks that broke 
the law were then the banks that decided how many people lost 
their homes because of their law breaking, and as a result, how 
many people would collect money in each of these categories. Is 
that right, Mr. Alt?
    Mr. Alt. Senator, as I said, I am not familiar with the 
basis for the schedule----
    Senator Warren. But there is no, so far as you know, no 
independent review of the banks' analysis of how many families 
broke the law. You looked at 100,000 cases and the banks have 
now put four million people into categories and resolved, 
finally, how much they will get from this review by the OCC and 
by the Federal Reserve, is that right? Mr. Ryan?
    Mr. Ryan. Senator, my understanding was the banks were 
supposed to put this together and the OCC was going to look at 
it, but I do not know exactly what transpired.
    Senator Warren. All right. But you made no independent 
review of this, were not asked to make any independent review 
of this.
    Mr. Ryan. We did not.
    Senator Warren. Mr. Flanagan?
    Mr. Flanagan. PwC was not involved in the settlement or the 
preparation of that schedule.
    Senator Warren. All right. Mr. Alt?
    Mr. Alt. Same answer, Senator. We were not involved.
    Senator Warren. All right. I just wanted to make sure, 
because it appears that the people who broke the law are the 
same people now who have determined who will be compensated 
from that law breaking. I just find this one amazing. Thank 
you. Thank you for your help.
    Mr. Chairman, I do not have any other questions.
    Senator Brown. Thank you, Senator Warren.
    To all of you, Mr. Ryan, thank you. Mr. Alt, thank you. Mr. 
Flanagan, thank you. The record will be open for 1 week for 
Committee Members, those here or those not here, to ask you 
questions in writing. If you would get those back to us as 
quickly as you can, if Members do that.
    The hearing is adjourned. Thank you very much.
    [Whereupon, at 12:17 p.m., the hearing was adjourned.]
    [Prepared statements and responses to written questions 
supplied for the record follow:]

                PREPARED STATEMENT OF DANIEL P. STIPANO
                          Deputy Chief Counsel
              Office of the Comptroller of the Currency *
                             April 11, 2013

I. Introduction
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     *Statement required by 12 U.S.C. 250:

    The views expressed herein are those of the Office of the 
Comptroller of the Currency and do not necessarily represent the views 
of the President.
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    Chairman Brown, Ranking Member Toomey, and Members of the 
Subcommittee, I welcome this opportunity to discuss the role of 
independent consultants in the Office of the Comptroller of the 
Currency's (``OCC'') enforcement process. In its letter of invitation, 
the Subcommittee expressed interest in the OCC's use of enforcement 
actions to require regulated institutions to retain independent 
consultants, and the OCC's oversight of the independent consultants 
when they are required.
    The OCC uses its supervisory and enforcement authorities to ensure 
that national banks and Federal savings associations (``banks'') 
operate in a safe and sound manner, provide nondiscriminatory access to 
financial services, treat customers fairly, and comply with applicable 
laws and regulations. As described below, the OCC and the other Federal 
banking agencies (``FBAs'') have a broad range of supervisory and 
enforcement tools to achieve this purpose. The FBAs' powers include the 
power to require banks to take specific actions to address and correct 
violations of law and unsafe or unsound practices. Pursuant to this 
authority, the OCC may require banks to retain independent consultants 
to work with them to identify the underlying causes of the violation or 
unsafe or unsound practice and to facilitate their correction.
    The OCC has used its enforcement authority to require banks to 
retain independent consultants in a significant number of cases and for 
a variety of purposes. For example, the agency has required banks to 
retain independent consultants to provide expertise needed to correct 
operational and management deficiencies; to comply with legal 
requirements, such as the Bank Secrecy Act (``BSA''); and to provide 
restitution for violations of consumer protection statutes. In these 
and other instances, the use of independent consultants provides banks 
with the additional knowledge, experience, and resources required to 
address deficiencies identified through the supervisory process. While 
we have found the use of independent consultants useful in many 
circumstances, it can be particularly valuable for community banks, 
which may lack the necessary expertise and resources to correct the 
problem on their own. In such cases, the use of independent consultants 
is not only helpful, but necessary, to ensure that the bank takes the 
requisite corrective action to operate safely and soundly and in 
compliance with the law. The use of independent consultants does not, 
however, absolve bank management and the bank's board of directors of 
their responsibilities. In this regard, a bank's board of directors is 
responsible for ensuring that all needed corrective actions are 
identified and implemented.
    Similarly, it is important to note that the independent consultants 
are not substitutes for the supervisory judgment of the OCC. The OCC 
retains sole responsibility for supervising the bank, including 
overseeing and assessing the bank's compliance with an enforcement 
action.
    The use of independent consultants as part of the Independent 
Foreclosure Review (``IFR'') differed substantially from the agency's 
normal practice in many significant ways. The breadth, scale, and scope 
of the reviews were unprecedented, as were the large number of 
institutions, independent consultants, and counsel involved in the 
process. The file reviews provided to be much more complex and 
challenging than we anticipated, and involved a number of decision 
points, all of which required substantial oversight by the OCC. In 
retrospect, it is clear that our approach under the IFR process did not 
serve the agency's objectives which were, first and foremost, to 
compensate borrowers in a timely manner for the financial harm they 
suffered from faulty foreclosure practices. Our failure to fully 
appreciate the breadth, scale, and complexity of the reviews and to 
define a comprehensive and effective project plan at the outset 
hampered the process.
    While the use of independent consultants can be an effective 
supervisory tool, there are certainly lessons to be learned from our 
experience, and we believe we can improve the process going forward. To 
that end, we plan to draw on our recent experiences when requiring 
banks to retain independent consultants and to enhance our oversight of 
the consultants when they are utilized.
    The Subcommittee's interest spans a broad range of topics. My 
testimony covers five key areas: 1) the OCC's authority to require the 
use of independent consultants; 2) the circumstances in which the OCC 
has ordered banks to engage independent consultants; 3) the OCC's 
oversight of independent consultants; 4) an overview of some of the 
significant results of the use of independent consultants; and 5) the 
future use of independent consultants in OCC enforcement actions.

II. The OCC's Enforcement Authority
    The OCC's enforcement process is directly related to our 
supervision of banks. The OCC addresses operating deficiencies, 
violations of laws and regulations, and unsafe or unsound practices at 
banks through the use of supervisory actions and civil enforcement 
powers and tools. Our enforcement policy \1\ is to address problems or 
weaknesses before they develop into more serious issues that adversely 
affect the bank's financial condition or its responsibilities to its 
customers. Once problems or weaknesses are identified and communicated 
to the bank, the bank's management and board of directors are expected 
to correct them promptly.
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    \1\ OCC's Enforcement Action Policy, which was publicly released as 
OCC Bulletin 2011-37, provides for consistent and equitable enforcement 
standards for national banks and Federal savings associations and 
describes the OCC's procedures for taking appropriate administrative 
enforcement actions in response to violations of laws, rules, 
regulations, final agency orders, and unsafe or unsound practices or 
conditions.
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    Banks are subject to comprehensive, ongoing supervision that 
enables examiners to identify problems early and obtain corrective 
action quickly. Because of our regular, and in some cases, continuous, 
onsite presence at banks, we have the ability in many cases to stop 
unsafe or unsound practices or violations of law without ever having to 
take an enforcement action. This approach permits most bank problems to 
be resolved through the OCC supervisory process.
    When this normal supervisory process does not result in bank 
compliance with the law and the correction of unsafe or unsound 
practices, or circumstances otherwise warrant a heightened enforcement 
response, the OCC has a broad range of enforcement tools. Among those 
tools is the ability to take formal enforcement action. Section 8 of 
the Federal Deposit Insurance Act (``FDI Act''), 12 U.S.C.  1818, 
gives the OCC the power to take formal enforcement actions to require 
the cessation of unsafe or unsound practices and ensure compliance with 
any law, rule, or regulation applicable to banks. For example, the OCC 
may issue a Formal Written Agreement or a Cease and Desist Order 
(``C&D'') requiring a bank to take actions necessary to correct or 
remedy the conditions resulting from a violation or unsafe or unsound 
practice. It is pursuant to this power that the OCC requires banks, 
when necessary, to retain consultants to provide independent expertise 
and resources to correct deficiencies.

III. OCC Use of Independent Consultants in Enforcement Actions
    It has been a longstanding practice of the OCC in enforcement 
actions to require banks to engage independent consultants. The nature 
and expertise of such consultants may vary, depending on the particular 
issues facing the bank and have included, for example, certified public 
accountants, lawyers, financial consultants, and information technology 
specialists. From 2008 through 2012, the OCC required banks to retain 
independent consultants in approximately 190 of 600 formal enforcement 
actions. The majority of actions taken have involved operational and 
compliance deficiencies, primarily in community banks.
    The OCC requires banks to retain independent consultants for a 
number of reasons. First, independent consultants have subject matter 
and process knowledge, and often have experience in dealing with 
similar situations. They can apply that knowledge and experience to 
focus on the supervisory issue, identify its scope, and work with bank 
personnel to correct the bank's conduct and to remedy the consequences 
of the violation or unsafe and unsound practice. Second, independent 
consultants can provide the resources necessary to carry out a task in 
a timely manner. Finally, independent consultants are, as the name 
suggests, independent from the activities being conducted. Thus, rather 
than having the bank review itself, the OCC may require the use of a 
third-party to exercise independent judgment in assessing the scope of 
the problem and the remedy. In all cases, however, the OCC retains the 
final decision in determining whether the bank's corrective actions are 
sufficient.
    The OCC has long required banks to retain independent consultants 
to assist the bank in addressing significant management and operational 
deficiencies. For example, in a sizable number of cases, when the OCC 
has supervisory concerns about bank management's ability to accurately 
assess the credit quality of a bank's portfolio, the OCC has ordered 
the bank to retain an independent consultant to review asset quality 
until such time as the bank implements an effective internal asset 
quality review system. In cases in which there is a question about the 
accuracy of a bank's books and records, the OCC has required banks to 
retain auditors to review those records, to assess their completeness 
and report on any deficiencies. The OCC has also ordered banks to 
retain independent consultants to perform annual reviews of methods 
used by banks to establish an allowance for credit losses. The OCC has 
required similar engagements by bank management to address deficiencies 
in a variety of other circumstances involving real estate appraisals, 
compensation, internal controls, and information technology systems. 
The majority of these cases are concentrated in community bank 
enforcement actions and reflect the fact that those institutions often 
have the greatest need for the expertise and resources that an 
independent consultant can provide to the banks' efforts to address 
deficiencies.
    More recently, in a substantial number of cases, the OCC has 
ordered banks of all sizes to retain independent consultants to address 
deficiencies in compliance with the BSA and anti-money laundering laws 
and regulations. These actions sometimes require the retention of an 
independent consultant to conduct a review of a bank's BSA staffing, 
risk assessment, and internal controls. The goal of such an engagement 
is to secure a thorough analysis of the responsibilities and competence 
of existing bank BSA staff; to assess the levels of risk to the bank 
given its account activity, customers, products, and the geographic 
areas in which it operates; and to review the adequacy of internal 
controls given the risks posed by the bank's profile. Based upon that 
analysis, the orders typically require the independent consultant to 
provide a report to bank management and the bank's board of directors 
that includes recommendations for improvements to the bank's BSA 
program to ensure future compliance with regulatory requirements.
    In other instances, the OCC has required the engagement of an 
independent consultant to conduct a review of the adequacy of actions 
already taken by the bank pursuant to its BSA program. These ``look-
backs'' involve reviews of filings made by a bank pursuant to the BSA 
requirements. For example, a number of orders issued by the OCC have 
required banks to retain independent consultants to review transaction 
activity to determine whether Suspicious Activity Reports (``SARs'') 
need to be filed by the bank, whether SARs filed by the bank need to be 
corrected or amended to meet regulatory requirements, or whether 
additional SARs should be filed to reflect continuing suspicious 
activity. The OCC has ordered similar look-backs by independent 
consultants of a bank's currency transaction reporting. Following these 
look-backs, OCC enforcement actions have required banks to amend or 
correct existing filings and make other filings as required for any 
previously unreported activity that falls within the regulatory 
requirements.
    The OCC has also ordered banks to engage independent consultants in 
consumer-related enforcement actions. For example, in a number of 
actions to remedy significant consumer law violations, including 
violations of Section 5 of the Federal Trade Commission Act regarding 
unfair or deceptive practices, the OCC has ordered banks to engage 
independent consultants to identify affected consumers, to monitor 
payments to such consumers, and to provide written reports evaluating 
compliance with specific remedial provisions in the enforcement 
actions. Similarly, the OCC has mandated the retention of an 
independent consultant to assist banks in developing and implementing a 
restitution plan provided for in the action. Finally, the OCC has 
required the engagement of independent consultants with claims 
administration experience to assist in carrying out the payment of 
required restitution to customers harmed by unfair or unsafe or unsound 
practices.
    In these and other engagements mandated by OCC enforcement actions, 
the independent consultants are providing expertise and resources to 
banks to promote compliance with regulatory obligations. The 
independent consultants are not playing a regulatory role. That is 
solely the province of the OCC.

IV. OCC Oversight of the Use of Independent Consultants in Enforcement 
        Actions
    The OCC oversees independent consultants in a number of ways. At 
the outset, the OCC can compel the bank to submit the independent 
consultant's qualifications to the OCC for prior review and non-
objection permitting the agency to assess whether the independent 
consultant has the requisite expertise and resources. This 
determination is based upon the OCC's exercise of informed supervisory 
judgment given the particular circumstances of the bank and the 
deficiency that gave rise to the enforcement action. The OCC also 
considers the proposed consultant's existing and prior relationships 
with the bank and potential conflicts of interest to determine whether 
there is a reason to believe that the independent consultant should not 
be engaged by the bank.
    In addition, prior to the engagement of the independent consultant, 
the OCC often reviews the engagement agreement to determine whether the 
scope of the work, the resources dedicated to the project, and the 
proposed timeline for completion are consistent with the intent of the 
enforcement action. If at any time the OCC determines that the scope of 
the engagement is not consistent with that intent, we can require the 
bank to modify or terminate the agreement.
    Thereafter, the OCC oversees the consultant and the progress of the 
engagement through its supervisory authority over the bank. The types 
and frequency of interactions between the OCC, the bank, and the 
independent consultant depend upon the particular facts and 
circumstances covered by the enforcement action, the expertise and 
resources of bank management, and the nature of the independent 
consultant's engagement. For example, in some cases, the issue may be 
discrete and the independent consultant's role is limited to the 
remedial steps the bank must take to comply with the enforcement 
action. In such circumstances, the appropriate oversight may involve 
very limited interaction. In other cases, the seriousness of the 
violation and its consequences may require more frequent interactions 
between the examiners, the bank, and the independent consultant, 
including periodic reports and meetings, to make certain that the 
engagement is proceeding properly and that the bank is taking the 
appropriate steps to correct the deficiency. If the OCC determines that 
is not the case, the OCC can direct the bank to take the actions 
necessary to put the process back on track.
    At the conclusion of the engagement, the enforcement actions often 
require a report of the findings and recommendations by the independent 
consultant to the bank's board of directors and management that is also 
required to be provided to the OCC. This gives the OCC the opportunity 
to assess whether all matters described in the action were addressed. 
If not, the OCC can require additional work to be performed or, if 
necessary, direct the bank to retain a different independent 
consultant. In a number of instances, the enforcement action also calls 
for the bank to prepare a plan to address the findings of the 
independent consultant. Such plans are often made subject to OCC review 
and non-objection before they can be implemented allowing the OCC to 
determine whether the underlying violations or practices will be 
corrected and remediation will be appropriately undertaken by the bank 
as called for in the enforcement action. Finally, the OCC examines the 
results of this entire process to validate that the bank, working with 
the independent consultant, has addressed and corrected the violation 
or unsafe or unsound practice that formed the basis for the enforcement 
action.
    The circumstances in which independent consultants were used under 
the IFR pursuant to the OCC's April 2011 Consent Orders, differed 
substantially from the typical use of independent consultants in OCC 
enforcement actions. The unprecedented breadth, scale, and scope of the 
reviews; the large number of institutions, independent consultants, and 
counsel involved in the process; and the complexity of the file 
reviews, which involved hundreds if not thousands of decision points on 
each file, required substantial regulatory oversight by the OCC and the 
coordination of multiple independent consultants' efforts. This 
expanded oversight included the issuance of joint guidance with the 
Federal Reserve Board; examiner visitation to the work locations of 
each of the individual consultants involved in the IFR process; and 
daily communications among consultants, servicers, and OCC supervision 
staff throughout the entire IFR process.

V. Significant Results
    The enforcement actions in which the OCC has required the retention 
and use of independent consultants have produced significant positive 
results in many cases, and the independent consultants that were 
retained played key roles in bringing about those results. For example, 
in consumer cases, the independent consultants were engaged to 
facilitate or ensure the payment by banks of hundreds of millions of 
dollars to consumers as a remedy for violations of consumer protection 
statutes.
    Similarly, in BSA cases, the OCC's requirement that banks engage 
independent consultants to conduct look-backs has resulted in 
substantial additional filings of SARs and, in certain cases, supported 
the OCC's assessment of significant Civil Money Penalties in response 
to the identified systemic failures of the banks to meet their anti-
money laundering obligations. Over the past 10 years, these BSA look-
backs have resulted in thousands of additional or amended SAR filings 
covering approximately $23 billion in suspicious activity.
    In all of these cases, the independent consultants, engaged by 
banks as a result of an OCC enforcement action, were instrumental in 
assisting the banks in addressing and correcting the underlying 
deficiencies and bringing about a successful supervisory outcome.

VI. Future Use of Independent Consultants
    The use of independent consultants has generally served the agency 
well in promoting banks operating in a safe and sound manner and in 
compliance with law. Given the experience with the IFR, the OCC is 
currently evaluating its use of independent consultants and exploring 
ways to improve the process, particularly for situations involving 
significant consumer harm or law enforcement implications.
    While the OCC believes its authority and use of independent 
consultants is generally appropriate, there is one area where we 
believe legislative action could be helpful. Under the current 
statutory scheme, the OCC faces significant jurisdictional obstacles if 
it seeks to take an enforcement action directly against an independent 
contractor.\2\ A recent court decision has further elevated the 
standard for taking such enforcement actions.\3\ The OCC would welcome 
a legislative change in this area that would facilitate our ability to 
take enforcement actions directly against independent contractors that 
engage in wrongdoing. Such a legislative change would be useful not 
only with respect to the use of independent contractors in an 
enforcement context but also, and perhaps more importantly, in cases 
where a bank has chosen to outsource significant activities to an 
independent contractor.
---------------------------------------------------------------------------
    \2\ In order to take an enforcement action against an independent 
contractor, the OCC is required to prove that the contractor engaged in 
knowing or reckless misconduct that ``caused or is likely to cause more 
than a minimal financial loss to, or a significant adverse effect on, 
the insured depository institution.'' 12 U.S.C.  1813(u)(4).
    \3\ In Grant Thornton v. Office of the Comptroller of the Currency, 
514 F.3d 1328 (D.C. Cir. 2008), the court held that the OCC must prove 
that the contractor was involved in the ``business of banking'' to meet 
the statutory jurisdictional requirements. Despite the fact that Grant 
Thornton was retained by the bank as a result of an agreement with the 
OCC to engage a nationally recognized accounting firm to conduct an 
audit of the bank's mortgage program and related records, the court 
held that the work performed by Grant Thornton did not fall within the 
business of banking and, therefore, the OCC had no jurisdiction to 
proceed.
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VII. Conclusion
    The OCC's longstanding practice to require banks to retain 
independent consultants to help them meet enforcement requirements has 
generally worked well. Through this practice, the OCC has caused banks 
to address effectively a variety of operating and management 
deficiencies, to come into compliance with laws, rules and regulations, 
and to operate in a safe and sound manner. Nonetheless, we believe 
there are lessons to be learned from both our recent experience and our 
many years of experience with independent consultants, and we are 
exploring ways to enhance the process.
                                 ______
                                 
                PREPARED STATEMENT OF RICHARD M. ASHTON
                         Deputy General Counsel
            Board of Governors of the Federal Reserve System
                             April 11, 2013

     Chairman Brown, Ranking Member Toomey, and Members of the 
Subcommittee, thank you for the opportunity to testify regarding the 
required use of third-party consulting firms (consultants) in Federal 
Reserve enforcement actions.

Use of Consultants by Regulated Banking Organizations
    At the outset, it might be helpful to point out that regulated 
banking organizations routinely choose to retain consultants for a 
variety of purposes apart from any supervisory directive by regulators 
to do so. Banking organizations decide to retain consultants because 
these firms can provide specialized expertise, familiarity with 
industry best practices, a more objective perspective, and staffing 
resources that the regulated organizations do not have internally. In 
this respect, reliance on consultants can significantly contribute to 
the overall efficient governance and management of these organizations 
as well as to their safe and sound operation and their compliance with 
supervisory expectations and legal requirements.

Use of Consultants in Federal Reserve Enforcement Actions
    In the vast majority of Federal Reserve enforcement actions, the 
organization itself, using its own personnel and resources, is directed 
to take the necessary corrective and remedial action. In appropriate 
circumstances, the Federal Reserve has found that it can be an 
effective enforcement tool to require regulated organizations to retain 
a consultant to perform specific tasks on behalf of that organization. 
However, the mandatory use of a consultant has typically not been a 
frequent requirement in Federal Reserve enforcement actions. And, 
importantly, consultants are used to conduct work that ordinarily the 
organization itself would be required to conduct. At all times, the 
Federal Reserve retains authority to, and does, review and supervise 
the consultant's work in the same manner as if the institution 
conducted the work directly. In all cases, the regulated organization 
is itself ultimately responsible for its own safe and sound operations 
and compliance with legal requirements.
    As a general rule, our enforcement actions require the use of 
consultants to perform specific functions that the organization 
involved should do but has shown that it cannot perform itself. This 
may be because a particular organization lacks the necessary 
specialized knowledge or experience. Similarly, the organization may 
not have sufficient staffing resources internally. In addition, it may 
be necessary to have a third party undertake a particular project 
because a more objective viewpoint is required than would be provided 
by the organization's management. Over the last 10 years, for instance, 
there were consultant requirements in an average of less than 15 
percent of all formal enforcement actions taken by the agency. In 
addition to formal enforcement actions, Federal Reserve examiners may 
informally direct organizations to retain consultants to undertake 
designated engagements on behalf of the organization where 
circumstances warrant.
    In our enforcement actions, we required the use of consulting firms 
to perform several limited, specialized types of work. In many of these 
enforcement actions, an expert third party must be retained to review 
and submit a report on a specific area of the organization's 
operations. These mandated reviews by consultants have often involved 
an evaluation of an organization's compliance program, its accounting 
practices, or its staffing needs and the qualifications and performance 
of senior management. These enforcement directives usually require the 
organization to incorporate the findings of the report into a plan to 
improve that particular area of operations. Federal Reserve regulators 
may also use the product of a consultant's work as a guide in 
developing the ongoing supervision of the organization.
    Another type of enforcement action where use of consultants has 
been required involves situations where examiners have found serious 
past deficiencies in an organization's systems for monitoring 
compliance with Bank Secrecy Act and anti-money laundering (BSA/AML) 
requirements. In these cases, our actions have required a consultant 
retained by the organization to review certain kinds of transactions 
that occurred at the organization over a specific past period of time 
and determine whether BSA/AML reports were filed as required with 
regard to those transactions. These reviews require the consultant to 
identify situations where a suspicious activity report or a currency 
transaction report should have been filed, rather than to perform an 
assessment of the organization's compliance program. After receiving 
the results of the consultant's review, the organization would then 
file all the required reports with the appropriate government agencies.
    Finally, in several recent enforcement actions that required 
organizations to identify and then compensate or otherwise remediate 
injured consumers, the organizations have been required to retain 
consultants to administer that process. In these actions, the 
consultants were required to make recommendations about the appropriate 
remediation to individual consumers or to make remediation decisions 
about individual consumers or review the organization's remediation 
decisions.

Federal Reserve Oversight of Consultant Performance
    When enforcement actions require a regulated banking organization 
to use a consultant to carry out a particular function, the Federal 
Reserve oversees the organization's implementation of this directive. 
Our standard practice is to require the organization's retention of a 
consulting firm to be first approved by the Federal Reserve. We 
typically look at the particular expertise and experience of the 
selected consultant. The resources and capacity of the firm to carry 
out the particular engagement are also examined. Whether the consultant 
has the appropriate objectivity and separation from management is also 
a key factor in assessing the acceptability of the firm. To assess 
objectivity, we examine the extent and type of work that the consultant 
has done for the organization in the past. One guiding principle is 
that a consulting firm should not be allowed to review or evaluate work 
that it has previously done for the organization. How these factors are 
evaluated is necessarily determined on a case-by-case basis, depending 
on the specific type of task the consultant is being required to 
perform. However, the approval of particular consultants is not 
perfunctory; where warranted we have disapproved a consultant that has 
been selected by an organization under an enforcement order 
requirement.
    Additionally, our general practice is to explicitly require that 
the letter between the organization and the consulting firm or other 
documentation that describes the scope, terms, and conditions of the 
particular engagement be approved by the Federal Reserve. Thus, we are 
able to assess whether the consultant's planned work will be consistent 
with what was intended in the enforcement action and whether effective 
safeguards of objectivity will be maintained.
    We also oversee the consultant's performance during the course of 
the engagement. This oversight can involve obtaining and reviewing 
interim progress reports from the consultant. We also can call for 
periodic meetings with consultant personnel, which can be as frequently 
as every week. If a consultant is not meeting the required standards of 
performance, we will inform the organization of the needed 
improvements, applying the same criteria as if the organization was 
performing the work with its own personnel.
    In sum, it is important to note that consultants retained under 
Federal Reserve enforcement actions work for the organization that 
retained them, and the organization, not the consultant, is responsible 
for correcting the deficiencies that triggered issuance of the 
enforcement action and for preventing their reoccurrence. Requiring the 
use of consultants to assist in implementing corrective and remedial 
measures is just one tool available to Federal Reserve regulators in 
fashioning formal enforcement actions. Our experience has shown that 
consultants can be expected to provide the expertise, experience, and 
third-party perspective needed by the regulated banking organization to 
better meet supervisory objectives, including assisting the regulated 
organizations with correcting particular governance or operational 
deficiencies identified through the supervisory process. However, in 
deciding to use this tool in appropriate cases, the Federal Reserve 
does not cede its regulatory responsibilities or judgment to those 
consultants. We require that regulated organizations comply with the 
same basic standards of prudent practices and compliance with 
applicable laws and regulations, irrespective of whether an 
organization has relied on the assistance of a consultant or not.

Use of Independent Consultants in the Independent Foreclosure Review
    Although it is not the specific subject of this hearing, it might 
be helpful to note briefly the independent foreclosure reviews required 
by the consent orders issued by the Office of the Comptroller of the 
Currency and the Federal Reserve against major mortgage servicing 
firms, and the role of the independent consultants required under those 
orders.\1\ In those mortgage servicing orders, the servicers were 
required to retain independent consultants to review foreclosure files 
of borrowers within a 2-year period to identify financial injury caused 
by servicer error. Recently, the regulators and 13 of the servicers 
subject to the foreclosure orders entered into agreements under which 
these servicers must make cash payments to borrowers and provide other 
borrower assistance. These payments and other assistance replace the 
independent foreclosure review by independent consultants that had been 
required of these servicers under the initial orders.
---------------------------------------------------------------------------
    \1\ Of the 16 servicing organizations subject to enforcement 
actions requiring independent foreclosure reviews, 10 are regulated by 
the Office of the Comptroller of the Currency, four are regulated by 
the Federal Reserve, and two organizations are regulated by both 
agencies.
---------------------------------------------------------------------------
    As we have explained, the regulators accepted these agreements with 
the 13 servicers because the agreements provided the greatest benefit 
to borrowers potentially subjected to unsafe and unsound mortgage-
servicing and foreclosure practices in a more timely manner than would 
have occurred under the review process. In practice, for these 
servicers, the scope of the inquiry required of the consultants to 
conduct the independent foreclosure review proved over time to be more 
expansive, time-consuming, and labor-intensive than what is typically 
required of consultants in Federal Reserve enforcement actions. The 
result was significant delays in providing funds to consumers. 
Accordingly, the decision to replace the review of individual 
foreclosure files by the consultants with agreements to pay cash and 
provide other assistance to borrowers was based on the specialized and 
unprecedented nature of the particular reviews the consultants were 
required to undertake.
    Thank you again for the invitation to appear before the 
Subcommittee today. I would be pleased to answer any questions you 
might have.
                                 ______
                                 
                    PREPARED STATEMENT OF KONRAD ALT
           Managing Director, Promontory Financial Group, LLC
                             April 11, 2013

    Mr. Chairman and Members of the Subcommittee, my name is Konrad 
Alt. Since 2004, I have been a Managing Director of Promontory 
Financial Group, based in our San Francisco office. Prior to joining 
Promontory, I held senior executive positions in the financial services 
industry and at the OCC, and served as counsel to this Committee. I am 
pleased to appear before you. My colleagues and I are grateful for your 
leadership on the important topic of this morning's hearing.
    My firm, Promontory Financial Group, has served as a formally 
designated independent consultant dozens of times, in connection with 
the enforcement activities of over a dozen different regulatory and law 
enforcement authorities, domestic and foreign. We believe our firm is 
well-suited to this role, and we take pride in these assignments. We 
appreciate, however, that the use of private-sector resources to 
further public purposes can present special challenges. We are pleased 
to discuss our experience with those challenges with this Subcommittee 
today.
    Your invitation letter raised nine specific questions. I will 
address each of them in turn.

Promontory's Business Framework
    Your first question asked that we address Promontory Financial 
Group's business framework and how independent consulting fits into 
that framework.
    Broadly speaking, Promontory Financial Group's business centers on 
helping financial institutions meet their business challenges in a 
manner consistent with regulatory requirements and expectations. 
Clients typically come to us for assistance in strengthening a 
particular aspect of their risk management or corporate governance, or 
because they want an independent assessment of whether some aspect of 
risk management or corporate governance needs strengthening. Our 
clients range from large, complex broker-dealers and central banks to 
credit unions and community lenders, and our work takes many forms. For 
example, we may be enlisted to help test risk models, run stress tests, 
administer compliance reviews, review board performance, perform a mock 
examination, or recommend improvements in operational risk reporting. 
Depending on the assignment, we can recommend improvements to 
strengthen corporate governance or risk management, bolster capital and 
liquidity, or better protect consumers. And, when approved to serve in 
a formally independent capacity, we can support the efforts of 
regulators by providing additional subject matter expertise or simply 
additional arms and legs.
    Our assignments are often challenging. They require us to 
synthesize many different types of information, to perform complex 
analyses, and to formulate and deliver actionable recommendations, 
often under short deadlines. Our work can have important consequences 
for the institutions we work with, for the individuals who work in 
them, and for their customers. We have a responsibility to take these 
assignments seriously, and we do.
    We believe that expertise, experience, and integrity are 
fundamental to our success, and we work hard to build and maintain a 
team of senior professionals who can deliver those qualities to our 
engagements. Many of our senior professionals have decades of 
experience. They know the laws and regulations deeply, and believe that 
compliance with them is centrally important to the fair and efficient 
operation of our financial system. More than that, they understand the 
expectations of financial regulators and can draw on their long 
experience to see where regulatory issues may arise.
    Notwithstanding that regulators have approved the Promontory 
Financial Group as an independent consultant many times, these 
assignments comprise only a small part of our caseload, less than 5 
percent of the nearly 1,500 engagements we have undertaken during the 
twelve years of our firm's existence.

Promontory's Experience as an Independent Consultant
    Your second question asked that we address Promontory Financial 
Group's experience as an independent consultant.
    Promontory Financial Group's business model requires us to bring a 
high level of independent judgment to all of our engagements, not just 
when we are formally designated as independent consultants. If we 
merely told our clients what they want to hear, we would lose 
credibility when the regulators show up and tell them something 
different, and our business would suffer accordingly. We have to have 
sufficient expertise to diagnose the issues and the solutions 
accurately. We have to have the integrity to take our diagnosis to the 
most senior levels of management and the board, even when our news and 
views are unwelcome. And we must have enough tact and diplomacy to 
communicate a tough message in a way that leads to constructive action.
    Our independent consulting assignments have involved over a dozen 
different regulatory authorities, including securities regulators, 
banking regulators and other law enforcement authorities, both 
domestically and internationally. These assignments have been disparate 
in nature. Many have focused on review of a specific body of 
transactions, such as, for example, the recently concluded foreclosure 
review assignments. Others have entailed evaluations of management 
teams or boards of directors. The scale and complexity of these 
assignments has also varied considerably. Some have been large, 
complex, and extended projects, but many have been quite small and 
narrowly focused.

Qualifications of Independent Consultants
    Your third question asked about the qualifications of independent 
consultants. Let me first address our view of the necessary 
qualifications and then speak to our experience working with regulators 
as they attempt to evaluate our qualifications.
    Given my preceding comments, it should not surprise you that we 
believe the most important qualifications for independent consultants 
are subject matter expertise and integrity. Expertise is particularly 
important. A consultant without sufficient expertise cannot accurately 
identify issues or appreciate their significance, and may not notice 
when something seems a little off and know to dig deeper for an 
explanation. That consultant is at risk both generally of doing a poor 
job and specifically of being unduly influenced by management views. 
But expertise is not enough. A consultant who lacks the integrity to 
deliver a tough message will, if a tough message is in order, deny the 
institution an adequately clear understanding of both the problem and 
the solution.
    In our experience, regulators look for essentially the same 
qualities. Characteristically, before approving our firm to serve as an 
independent consultant, a regulator will ask us to answer a number of 
questions that go to both our expertise and our independence. To judge 
by the questions they pose in evaluating our credentials, most 
regulators take similar approaches to evaluating expertise. Typically, 
they will want to know both about our firm's experience working in the 
subject matter under review, and about the qualifications of the 
individual or individuals proposed to lead and carry out the 
engagement. For example, if Promontory were proposed to perform an 
independent review of a consumer compliance issue, we would expect the 
regulator to inquire about our firm's experience in performing similar 
reviews, and about the specific qualifications and experience of the 
individual or individuals slated to conduct the review on behalf of our 
firm.
    The questions we receive relating to independence, by contrast, are 
more varied, and tend to focus on the presence or absence of red flags 
suggesting a potential conflict. For example, in my own recent 
experience, one agency seemed particularly concerned with establishing 
that members of our team were free from past employment relationships 
or personal investments that could compromise their independence. 
Another focused on the nature and extent of past business 
relationships. A third wanted assurance that we would structure the 
working relationships with the institution to maintain our independence 
appropriately, for example, by memorializing all communications with 
the institution for potential regulatory review. Regardless of the 
specific concerns of the agency involved, we cooperate fully with all 
requests for information and, of course, accept the regulator's 
judgment as to our fitness for service as an independent consultant.

Working Relationships with Regulators and Financial Institutions
    Your fourth and fifth questions asked about the working 
relationship between independent consultants, regulators, and financial 
institutions and the nature of regulatory oversight we experience. As 
these questions are related, I will address them together.
    In our experience, regulatory agencies all employ a range of 
oversight methods with regard to the independent consultants that work 
for them. Not surprisingly, the nature and extent of regulatory 
oversight we experience varies according to the nature and complexity 
of the review in question. In a small project--for example, a short, 
independent review of the management team at a community bank--
regulatory oversight may consist simply of presenting our final report 
to a regulatory examination team and responding to any questions they 
may have about our findings and recommendations. In larger, more 
complex assignments, regulators will commonly deploy additional 
oversight methods, which can include review and signoff on our review 
methodology; receipt of regular status reports, usually in writing and 
often in combination with periodic in-person or telephonic meetings; 
sampling of our results; review of our workpapers; review and signoff 
on preliminary findings and recommendations; and deployment of field 
examiners to monitor the conduct of our review teams. We welcome all of 
these oversight methods and cooperate fully with them.
    Recognizing that the goal of an independent review is to satisfy 
the regulator's requirement and that, in performing an independent 
review, we are working for the regulator, we generally try to structure 
a working relationship with the regulator that is as transparent as we 
can make it. Transparency helps to ensure that any questions or 
concerns the regulator may have about our work surface proactively, and 
allows the regulator to have confidence that we are pursuing our 
responsibilities thoroughly and professionally. To facilitate 
transparency, we will often incorporate into our working relationship 
with the regulator some of the same practices I have just mentioned. 
For example, we may on our own initiative solicit regulatory feedback 
on a proposed methodology or initiate periodic written or in-person 
status updates to the regulators.
    Our practices in regard to the financial institutions involved are 
similar. In general, we strive to be transparent, to avoid surprises, 
and to build confidence that we are approaching the review in a manner 
well-suited to identify and address the issues that have triggered 
regulatory concern. And, as with the regulators, we pursue this 
objective primarily through regular communication.
    Unless regulatory direction or some special characteristic of the 
assignment dictates otherwise, we commonly will provide the financial 
institution with our preliminary results, either as we develop them or 
in the form of a preliminary report. We do this primarily for purposes 
of fact checking. The institution has a strong incentive to highlight 
any information we may have missed or misunderstood, and we want our 
work to be as factually accurate and as complete as possible. Not 
incidentally, this practice is also helpful in enabling management to 
begin to understand and accept the results of our review. To help 
ensure that management pushback in this process doesn't compromise the 
independence of our review, we make it clear to management that we are 
soliciting factual corrections only, and often provide the same 
preliminary results simultaneously to the regulators. We carefully 
track both the responses we receive from the institution and the 
changes, if any, we make in response to them, so that regulatory 
personnel will have a complete audit trail in case they wish to 
evaluate whether we have maintained appropriate independence.

Potential for Compromised Quality
    Your sixth question concerns the potential for preexisting 
contractual or business relationships to compromise the quality of 
consultant services.
    In some circumstances, prior work with a particular institution 
will constitute an absolute bar to taking on an independent review 
assignment. We could not, for example, undertake to review as an 
independent consultant issues or programs we had previously reviewed, 
and we have declined work in such circumstances.
    More commonly, however, our prior work will not be related to the 
subject matter of the independent review. In those circumstances, prior 
to applying for the independent consulting assignment, we will try to 
make a judgment taking into account the nature of the prior work, the 
extent of past dealings, how long ago they occurred, and whether we 
have the ability to establish appropriate ethical safeguards to ensure 
that past relationships do not compromise our independence. We 
typically make these judgments in consultation with both the regulator 
and the institution involved. The regulator always has the final say.
    The challenges we face in this area are not unique to our firm or 
to the work we do as a formally designated independent consultant. All 
professional services firms, if they stay in business for any length of 
time, develop a history of past assignments and past clients, and must 
develop techniques for recognizing and mitigating the conflicts that 
such a history can present.
    Promontory Financial Group seeks to safeguard its independence and 
the quality of its reviews in three ways.
    First, we pay attention. We know that conflicts could compromise 
the quality of our work, or undermine confidence in our work, and we 
try to adopt and maintain reasonable safeguards to mitigate these 
risks. Depending on the issues presented, these safeguards have 
included the establishment of ethical walls, the prohibition of 
individuals with personal relationships or past employment histories 
with the client from serving on an engagement team, and prohibitions on 
soliciting other business from institutions where we have ongoing 
independent consulting responsibilities. In the recently concluded 
foreclosure review, for example, we established toll-free hotlines to 
allow all project team members to raise anonymously any concerns they 
might have about breaches of independence, and we supplemented those 
hotlines with recurring internal communications efforts, underscoring 
our commitment to independence, integrity, and professionalism. When 
such safeguards are not sufficient, we can decline and have declined 
assignments.
    Second, we can often structure the engagement in such a way as to 
enhance our independence, for example, by establishing that, in our 
dealings with the institution, we will report to an independent unit of 
management, such as the internal audit or risk function, or to an 
independent committee of the board of directors. Regulatory enforcement 
actions requiring the use of an independent consultant not infrequently 
require the establishment of a committee of independent directors to 
oversee the consultant's work. We have found such arrangements a useful 
safeguard in many engagements.
    Finally, and most importantly, we maintain a senior team of 
professionals with strong personal stakes in their individual 
reputations, and the firm's collective reputation, for integrity and 
professionalism. We constantly impress upon that team the importance of 
maintaining those reputations by executing our engagement 
responsibilities with uncompromising professionalism. We have turned 
down and will continue to turn down business when we feel we cannot 
pursue it at a level of professionalism consistent with our standards.

Legal Obligations to Institutions and Regulators
    Your seventh question asked what legal obligations Promontory 
Financial Group has to both the regulated financial institution and the 
financial regulator during an independent review.
    Promontory Financial Group is not a regulated entity and we rarely 
contract directly with regulatory authorities. As a general matter, our 
legal obligations are set forth in detailed engagement letters that we 
enter into with the financial institutions that are the subject of our 
reviews. In situations where we serve as formally designated 
independent consultants, these engagement letters will often 
incorporate portions of the relevant enforcement action by reference. 
Although executed by Promontory Financial Group and the financial 
institution, these letters are commonly subject to regulatory review 
and, at regulatory direction, often include express language describing 
our obligations to regulatory authorities while serving as an 
independent consultant. Although the financial institution may be our 
contractual counterparty in these engagements, the regulator is 
effectively our client and we serve at the regulator's pleasure.

Regulatory Activities that Independent Consultants Cannot Perform
    The eighth question in your invitation letter asked that we address 
regulatory activities that independent consultants cannot perform, and 
inquired how we might report compliance issues we identify that are 
outside the scope of a particular assignment.
    We believe the answer to the first part of this question is simple: 
consultants cannot perform regulatory activities. Regulation is the 
domain of public officials, accountable to Congress and the American 
people. Private consultants, independent or otherwise, are advisors, 
nothing more. We don't make regulations. We don't issue guidance. We 
don't assign examination ratings. And we don't bring enforcement 
actions. We can make recommendations to regulators but we cannot and do 
not perform regulatory activities. Even when we act as a formal 
independent consultant pursuant to a regulatory enforcement action, our 
findings and recommendations have no effect until and unless the 
regulators adopt them. In our experience, regulators all over the world 
take that review and approval responsibility seriously.
    As to the second part of your question, our engagements always have 
a defined scope. We do not actively look for issues outside of that 
scope. How we would proceed if we nonetheless found such an issue would 
depend on the facts and circumstances of the situation. Whether we 
would escalate it to the attention of regulatory authorities might 
depend, for example, on whether the institution had already escalated 
the issue on its own initiative.

Other Relevant Policies and Practices
    Your invitation letter's final question asks us to describe other 
practices that Promontory Financial Group has established to ensure 
high quality and consistent oversight of financial institutions.
    In general, Promontory Financial Group is not in the business of 
providing oversight. As I have noted, we are consultants, not 
regulators. We may assist an institution in self-monitoring, a form of 
internal oversight, or we may, pursuant to a regulatory enforcement 
action, assist the oversight efforts of an agency at a particular 
institution.
    In these activities, and in all of our activities, quality and 
consistency matter to us. Both domestically and internationally, my 
Promontory Financial Group colleagues and I have worked to build what 
we believe is the world's leading consultancy in our area of practice. 
We seek to promote quality principally by hiring the most experienced 
and expert talent we can find to lead our engagements, and then by 
giving those leaders the support they need to do their very best work. 
That support includes an outstanding pool of mid-level and junior 
talent to staff their engagements, as well as systems resources and 
education, training, and quality assurance programs to help them 
recognize and address consistency issues.

Concluding Observations
    The use of private sector resources to support the activities of 
Federal regulators raises a number of legitimate public policy 
questions. My colleagues and I applaud this Subcommittee's interest in 
seeking assurance that the firms enlisted in such roles are qualified, 
and can be depended upon to support the public interest without 
compromise. I hope my responses to the questions your invitation letter 
posed have been helpful. I will be pleased to address any additional 
questions you may have for me this morning.
                                 ______
                                 
                PREPARED STATEMENT OF JAMES F. FLANAGAN
                Leader, U.S. Financial Services Practice
                       PricewaterhouseCoopers LLP
                             April 11, 2013

    Chairman Brown and Ranking Member Toomey, thank you for the 
opportunity to provide this written testimony on behalf of 
PricewaterhouseCoopers LLP (``PwC''). I lead PwC's financial services 
practice. In this role, I help manage and oversee the firm's diverse 
services to the banking and capital markets, insurance, and asset 
management sectors.
    While the vast majority of our consulting engagements are unrelated 
to Government enforcement proceedings, from time to time we have served 
as an independent consultant in relation to regulatory safety and 
soundness or compliance enforcement orders involving financial 
institutions. The most recent examples of such work are the Independent 
Foreclosure Review (``IFR'') engagements that the firm performed for 
four mortgage servicers, under the oversight and guidance of the 
Federal Reserve Bank (the ``Fed'') and the Office of the Comptroller of 
the Currency (``OCC''). I was one of the senior firm leaders who 
oversaw our IFR engagements for the past 2 years.
    In this written testimony, I will first describe briefly the full 
range of services that our firm provides for financial institutions, 
with emphasis on the history, nature, and scope of our financial 
services regulatory advisory practice. Next, I will provide the 
Subcommittee with our perspective on the usual role of the independent 
consultant in matters relating to agency enforcement orders. In so 
doing, I will specifically address the standards of professionalism and 
objectivity to which PwC adheres when performing regulatory consulting 
engagements, including ones related to agency enforcement orders. 
Finally, as an example of recent experience in this type of work, I 
will share some observations about our role as Independent Consultant 
in the IFR engagements.

I. PwC and its Financial Services Practice
    PwC is a U.S. partnership with over 37,000 dedicated employees, 
principals, and partners. We provide an array of professional services 
to public and private companies, the Federal Government, State and 
local governments, and individuals. We have built our brand through the 
delivery of quality services to our clients and by performing those 
services with integrity, objectivity, and professionalism.
    We provide professional services to clients in more than 16 
industry categories, including financial services. Our financial 
services practice provides audit and other permitted services to 
financial services clients, as well as a full range of expertise and 
services--including tax, regulatory, compliance, and risk management 
services--to our non-audit clients. Our clients include national, 
regional and local banks, mortgage servicers, asset managers, insurance 
companies, and private equity firms. Through the provision of diverse 
services to the full range of financial service entities, we have 
developed broad and deep experience in considering and helping our 
clients address regulatory and compliance matters. Our work on such 
matters on behalf of our audit and tax clients has contributed to--and 
regularly benefits from--the expertise of the financial services 
regulatory advisory practice.
    Although regulatory advisory work to financial services clients is 
just a small fraction of the overall work that we do, I will discuss it 
further given the Subcommittee's interest in these services. For PwC, 
this year marks the 25th anniversary of our financial services 
regulatory advisory practice. The practice began just before the 
passage of the Financial Institutions Reform, Recovery, and Enforcement 
Act of 1989 and the Federal Deposit Insurance Corporation Improvement 
Act of 1991. Understanding these landmark laws, their implementing 
rules, and their impact on our clients, was important to performing our 
core client services. As a consequence of the deep learning we 
developed in the evolving financial services regulatory arena, 
financial institutions increasingly came to us for advice as they 
developed their approaches to regulatory compliance.
    From our vantage point, the demand for financial services 
regulatory advisory services has only increased with the enactment of 
the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 
(``Dodd-Frank''). As the Subcommittee knows, Dodd-Frank made scores of 
important changes to banking and securities laws, including the 
creation of new types of regulation, new ways of regulating financial 
institutions, new regulatory agencies, new regulation for some firms, 
and new regulators for other firms. To meet our clients' needs, we have 
been expanding our regulatory advisory practice, tapping risk, 
technology and other areas within our firm, and hiring a number of 
experienced professionals. These individuals--and our regulatory 
practice as a whole--do not lobby Congress or the agencies or otherwise 
advocate for our clients before the agencies. Rather, we combine our 
regulatory expertise and experience with our accumulated market 
knowledge to advise clients that operate in a highly regulated industry 
on solutions to their complex business challenges.
    Because there is a regulatory aspect to virtually every service or 
product financial institutions offer, regulatory considerations play a 
central role in our clients' strategies and business models. We 
consequently view our regulatory advisory practice as an important part 
of the full range of client services we provide. While most of our 
financial services advisory work involves assisting clients in their 
efforts to better understand and comply with emerging regulatory 
matters, we are occasionally engaged in connection with regulatory 
enforcement proceedings to assess historical practices, advise on 
remediation of past regulatory infractions, or evaluate compliance with 
a regulatory mandate.

II. Matters in which Financial Institutions Are Subject to Consent 
        Orders or Decrees
    A. The Role of the Independent Consultant
    In our experience, the scope and substance of an independent 
consultant's work depends on the agency order and on the particular 
circumstances of the financial institution. There is neither a one-
size-fits all consent order nor a typical independent consultant role.
    While the nature of the independent consultant's role will depend 
on the agency order, a few general observations based on our experience 
may help the Subcommittee:

       Though not all agency or law enforcement orders require 
financial institutions to hire independent consultants in connection 
with required remediation, financial institutions subject to 
enforcement actions often hire outside consultants to assist in 
responding to adverse regulatory actions. In those circumstances, the 
outside consultant is usually hired both for its substantive expertise 
and experience in the area and for its objectivity.

       Independent consultants often are retained in 
enforcement-related matters because of their specialized expertise in 
areas that the financial institution is required to remediate. Those 
areas often include: corporate governance; credit, market, or 
enterprise risk management; technology; internal audit; compliance; and 
regulatory reporting. While financial institutions often have 
experienced professionals working in those areas, they may lack 
specialized expertise to address matters of particular complexity.

       In particularly large or difficult cases, independent 
consultants can be used to provide the scale of assistance and review 
that neither the financial institution nor the enforcement agency can 
dedicate to the matter.

       In some instances, the independent consultant is 
retained to make an independent assessment of whether an institution 
has done what the agency required and/or to monitor the institution's 
satisfactory compliance with the order's requirements.

    Although the appropriate qualifications for an independent 
consultant vary depending on the nature of the underlying proceeding, 
the usual prerequisites for an independent consultant include:

  (1)  Significant subject matter experience and expertise;

  (2)  A track record of integrity, objectivity, and impartiality, such 
        that the consultant's advice will be respected;

  (3)  Significant experience managing projects of the size or 
        complexity at issue; and

  (4)  Sufficient dedicated personnel and resources to perform quality 
        work promptly and in a cost-effective manner.

    Of these qualifications, project management is an often overlooked 
but an invaluable skill, given that many independent consulting roles 
involve substantial matters of great complexity. While a professional 
services firm might be a subject-matter expert and have a sterling 
ethical reputation, those attributes alone may not ensure a successful 
project when the scope of the work requires substantial dedication of 
resources. For that reason, large or complex projects require a 
consultant that has relevant experience managing significant 
engagements and is able to organize a comprehensive undertaking that 
includes: appropriate professional training and supervision; 
consistent, reliable, and robust processes, procedures, and controls; 
and efficient and cost-effective service delivery. Moreover, the 
independent consultant must possess the competence and reputation for 
integrity necessary to have frequent, meaningful, and reliable 
interaction with regulators.
    B. PwC's Objectivity
    Our regulatory advisory engagements generally are performed under 
the consulting standards promulgated by the American Institute of 
Certified Public Accountants (``AICPA''). Among other things, the AICPA 
standards require that we perform our work objectively and free of any 
conflicts of interest.
    In an effort to maintain our objectivity and impartiality on all of 
our professional services engagements, PwC has implemented a system of 
processes and controls that governs which engagements we will pursue 
and accept, the scope of services that we can and will provide to a 
client, and any engagement-specific measures that need to be 
implemented. Further, we may tailor additional processes and controls 
to address circumstances that are particular to an engagement or set of 
engagements. For example, given the nature of the IFR engagements, we 
implemented additional procedures to identify and monitor any potential 
new engagements that reasonably could be viewed as implicating our 
ability to perform the IFR engagements with objectivity and 
impartiality. As a consequence of those controls, we declined to pursue 
several engagement opportunities.

III. The IFR Engagements
    We believe that it may be helpful to the Subcommittee to briefly 
discuss our experiences with the IFR engagements, in light of the 
general principles that we have discussed above.
    A. PwC's Retention and Approach to the IFR Engagements
    As the Subcommittee knows, in April 2011, the Fed and the OCC 
entered into consent orders with 14 residential loan servicers that 
required, among other things, that those servicers retain Independent 
Consultants to review their foreclosure-related actions in 2009 and 
2010. Four servicers retained PwC as their Independent Consultant.
    Our engagements were performed in accordance with (1) the consent 
orders that the servicers entered into with the Fed or the OCC; and (2) 
the specific terms of the engagement letters with each servicer, which 
required regulatory review and approval before they were final. The 
four servicers for which PwC acted as Independent Consultant are: GMAC 
Mortgage (``GMAC'') and SunTrust Mortgage (``SunTrust''), both of which 
are regulated by the Fed, and U.S. Bank National Association (``U.S. 
Bank'') and Citibank N.A. (``Citibank''), both of which are regulated 
by the OCC. Three of the servicers for which PwC acted as Independent 
Consultant joined the January 2013 settlement. Our IFR work on the GMAC 
engagement continues.
    While much of the recent focus has been on the goal of identifying 
and remedying financial harm to individuals, the Fed and the OCC 
directed the Independent Consultants to: first, identify servicer 
errors, regardless of whether they caused financial harm to borrowers; 
and, second, determine which servicer errors caused financial harm to 
the borrowers. The consent orders and regulator-approved engagement 
letters established the Independent Consultants' scope of work and 
specified many of the procedures to be followed. Moreover, the 
regulators guided and supervised the work as it was performed.
    Despite the detail in the consent orders and in the engagement 
letters, the scale and complexity of the IFR engagements were 
unprecedented and had not been entirely anticipated before the 
engagements began. As the Government Accountability Office (``GAO'') 
noted in its report last week, the IFR engagements involved applying 
hundreds of procedures to thousands of loan files to identify potential 
errors in dozens of different categories. No two borrower files were 
the same and often lacked relevant documentation, requiring that 
engagement teams identify gaps or deficiencies in documentation and 
request the missing material from the servicers. Further, servicers' 
legal obligations varied by State, and legal advice provided to the 
Independent Consultants evolved, as the Independent Legal Counsel 
(engaged by the servicers pursuant to the orders to provide advice on 
the laws of the more than 50 relevant State and Federal jurisdictions) 
took stock of the distinct and sometimes inconsistent Federal and State 
laws. As the engagements progressed, the regulators also added to the 
elements of the loan file that needed to be reviewed. Indeed, aspects 
of the legal and regulatory guidance remained unresolved even as late 
as January 2013. Together, these challenges placed a particular premium 
on the thoroughness of reviewer training and the quality and competence 
of the reviewers themselves.
    B. The Objectivity of Our IFR Engagement Teams
    From even before our formal engagement, we adopted procedures to 
maintain our objectivity and impartiality:

   In advance of our engagements by the servicers, we 
        disclosed to the Fed and the OCC all recent and ongoing 
        relationships with the servicers that were considering engaging 
        us as Independent Consultant. We were engaged only after the 
        Fed and the OCC considered that information and approved both 
        our engagement by the servicer and the terms of our engagement 
        letters;

   Our engagement letters mandated that we perform our IFR 
        engagements with objectivity and impartiality and that we 
        report to the regulators any attempts by a servicer to 
        interfere with our efforts; and

   We tailored our controls to mitigate any risk that our IFR 
        engagement teams might be subject to inappropriate information 
        or influence.

When, in May 2012, the OCC requested that the Independent Consultants 
submit for regulatory approval certain types of prospective 
engagements, we set up an internal process to identify any potential 
covered engagements and agreed to seek regulator approval for certain 
types of prospective engagements.
    C. Our Services Were Rendered by Experienced, Talented, and Well-
        Trained Professionals
    We staffed our IFR engagement teams with qualified PwC 
professionals and provided them with substantial, multi-week training. 
At its peak, our IFR engagements involved over 1,500 PwC professionals 
working at multiple locations around the country. We addressed the 
complex and dynamic nature of these engagements by establishing 
processes designed to take advantage of the scale of that effort while 
providing appropriate controls for our work.
    Critical to large and complex engagements is having systems that 
provide for consistently applied standards and procedures within the 
engagement. For the IFR engagements, each engagement team performed 
three core levels of review: (1) the primary review teams examined each 
of the files designated for examination; (2) a secondary team of 
professionals reviewed that work to provide coaching and guidance to 
the primary reviewers; and (3) our tertiary reviewers then assessed the 
overall work. The tertiary reviewers were responsible for examining all 
of those files identified as containing potential errors and selected 
samples of files for review based on a variety of factors. PwC 
supplemented the training provided to the professionals assigned to 
these tasks based on the complexity of certain loan files, with 
particular attention to issues such as errors related to the 
Servicemembers Civil Relief Act.
    In addition to the three-tiered review within each engagement, PwC 
formed a centralized Quality Assurance (``QA'') team that tested the 
work of each IFR engagement team. The QA team consisted of experienced 
file review professionals. The team's charter was to assess the quality 
of the engagement teams' file reviews, to provide feedback to those 
teams on the quality of the file reviews, to follow up on any 
identified issues to help train the professionals assigned to review 
files, and periodically to report the QA team's observations to the OCC 
and the Fed.
    Finally, within the bound of our obligations to maintain client 
confidentiality, the leaders of the PwC IFR engagement teams regularly 
communicated with each other to share their experiences and to address 
common issues of process, technology, and regulator guidance. This 
collaboration played an important role in promoting efficient execution 
of our engagements.
    D. PwC Cooperated Fully and Was Transparent with the Regulators
    The Fed and the OCC directed the scope and detail of the IFR 
process from its inception. The regulators established the initial 
scope of work through the April 2011 consent orders and through review 
of the procedures set forth in each of the engagement letters that they 
approved. Throughout the IFR engagements, the regulators provided 
additional procedures, issued new instructions, and adjusted the scope 
of work. These modifications came through written and informal guidance 
from the regulators' Examiners-in-Charge (``EICs'') and through 
regulators' periodic discussions with the Independent Consultants, as a 
group and individually.
    PwC worked closely with the OCC and the Fed throughout the IFR 
engagements. Shortly after the file review segment of the IFR 
engagements began in earnest, we provided the regulators with weekly 
written and oral status updates on our work; we met with the regulators 
for more extensive discussions about the IFR effort on a number of 
occasions; beginning in 2012, we provided cost and hours reports to the 
regulators; and we interacted regularly with the servicers' EICs. The 
regulators assessed the progress of PwC's IFR work, visited the loan 
review sites, and met with our engagement teams. When necessary, PwC 
sought and received guidance on uncertain or unresolved issues.
    Because of PwC's role as an objective and impartial Independent 
Consultant--and our consequent sensitivity to being perceived as an 
advocate for the servicers--we were careful to avoid exerting 
inappropriate influence over the ongoing execution of the IFR process. 
PwC instead followed the procedures mandated by the regulators, raised 
questions with the regulators when challenges arose or became apparent, 
and continued as efficiently and effectively as possible to satisfy the 
engagement letters' mandate to (1) identify servicer errors related to 
foreclosure proceedings in 2009 and 2010, irrespective of borrower 
harm, and (2) determine instances where borrowers suffered financial 
harm because of servicer error or misconduct.

IV. Conclusion
    On behalf of my partners and colleagues at PwC, I would like to 
thank the Subcommittee for the opportunity to provide this written 
testimony. I look forward to the opportunity to discuss these matters 
further and to answer your questions during the upcoming hearing.
                                 ______
                                 
                    PREPARED STATEMENT OF OWEN RYAN
              Partner, Audit and Enterprise Risk Services
                         Deloitte & Touche LLP
                             April 11, 2013

    Chairman Brown, Ranking Member Toomey, other Members of the 
Subcommittee, good morning. My name is Owen Ryan and I lead the 
Advisory practice at Deloitte & Touche LLP (``Deloitte''). Our Advisory 
practice offers a wide range of services to clients in most major 
industries. Our services include:

   Cyber, security and privacy;

   Governance, regulatory and risk management;

   Finance operations and controls transformation;

   Financial accounting and valuation;

   Internal auditing; and

   Mergers and acquisitions.

    I am a certified public accountant and have more than 28 years of 
professional experience. I serve on both the Deloitte & Touche LLP 
Board of Directors and its Executive Committee.
    In your invitation you asked our Firm to discuss our role as 
independent consultant for financial institutions, and the role of 
independent consultants more generally. Before I do so, I would note 
that we served as the independent consultant on the mortgage 
foreclosure review for JPMorgan Chase. My remarks, I believe, will be 
responsive to your invitation letter and generally be applicable to our 
foreclosure review engagement. I would also note that Deloitte is not a 
law firm, and therefore my testimony today is not based on legal 
analysis, but is instead based on my professional experiences.
    Deloitte member firms employ more than 190,000 individuals globally 
and the United States firms employ almost 60,000 people. We provide 
professional services in four key areas--audit, advisory, tax and 
consulting. Our business framework allows us to provide a wide range of 
professional services, based on the needs of our clients. While 
independent consulting engagements do not represent a substantial 
portion of our business, I can assure you that we take our role 
seriously. We strive to fulfill our professional obligations to provide 
independent, objective and quality services, consistent with the 
highest standards of our profession.
    Before accepting a role as independent consultant, our firm 
determines if we have the requisite experience, qualifications and 
appropriate number of professionals to execute our responsibilities. 
Our professionals serving on these types of engagements generally have 
auditing, consulting, industry or regulatory experience. Supplemental 
training on rules and regulations pertinent to each engagement may be 
necessary. In addition, it may be important for these professionals to 
have experience working on, or handling, large-scale, complex and 
evolving engagements. We believe we were well qualified to serve as the 
independent consultant for the foreclosure review.
    We know from our experiences that it is important to maintain open 
communication and an appropriate working relationship among the 
independent consultants, the regulators and the institutions being 
monitored. Frequently scheduled meetings and timely reporting are 
important mechanisms for communicating our approach and progress.
    Independent consulting engagements often result from regulatory 
directives. As such, these engagements are subject to the oversight of 
regulators, as determined by their requirements. These requirements 
generally include regulatory approval of the independent consultant and 
the scope and methodology to be used.
    Given the relatively small number of firms with the scale and 
expertise required to serve as an independent consultant on large 
engagements, it is often the case that a firm will have some previous 
relationships with an institution. Our policies and procedures are 
designed to ensure that each engagement is approached with due 
professional care, objectivity and integrity, consistent with American 
Institute of CPAs Consulting Standards. These policies and procedures 
include disclosing to the regulator our previous relationships with the 
institution before accepting the engagement. Circumstances may also 
dictate the need for us to decline the engagement altogether.
    The engagement letter generally defines our professional 
obligations. As part of our engagement acceptance procedures, we would 
identify any regulatory considerations that are not within our purview 
and expertise as an independent consultant. To the extent we become 
aware of compliance issues outside the scope of our purview, we would 
obviously fulfill all reporting obligations to the regulator.
    Deloitte policies and procedures promote the delivery of 
consistent, high quality services in our independent consulting 
engagements. Quality control and assurance are integral to the success 
of all of our engagements, and we take care to build them into the 
design, execution and review of our projects. We conduct mandatory 
training for our professionals and rigorously monitor the quality of 
our work on our independent consulting engagements.
    As a firm, we have been in business for over 100 years. We know 
that our reputation is our most important asset. As such, independence, 
integrity and objectivity are of paramount importance to us. We take 
very seriously our professional obligations. We have an overriding 
commitment to excellence in everything we do.
    I thank you for providing me with this opportunity to testify and 
would be happy to answer any questions you have.

RESPONSE TO WRITTEN QUESTIONS OF CHAIRMAN BROWN FROM DANIEL P. 
                            STIPANO

Q.1. In response to a question regarding the OCC's current 
standards for determining the independence of consultants hired 
by financial institutions, you stated that the OCC had not 
``reached the point of putting pen to paper'' to outline its 
policies for a consultant's independence, despite the fact that 
the OCC has required financial institutions to retain 
independent consultants in approximately one third of its 
approximately 600 formal enforcement actions over the past 5 
years.
    Has the OCC established a procedure to develop these 
requirements, including the factors to be considered, the 
parties to be consulted, and the timeline for rules?
    Given the issues raised and recent concerns about 
independent consultant conflicts and performance, does the OCC 
feel that it is appropriate to continue requiring institutions 
to hire independent consultants without having a policy in 
place?
    Will this policy be available for review by financial 
firms, consulting firms, Members of Congress, and the public?

A.1. The OCC is currently in the process of developing guidance 
for the use of independent consultants in enforcement actions. 
The guidance will cover the due diligence expected of an 
institution in proposing potential independent consultants, the 
review conducted by the OCC of the proposed consultants, the 
criteria for assessing the competence and independence of the 
consultants, the level of oversight by the OCC of the 
consultant engagement, and the validation conducted through the 
examination process of the work of the independent consultants.
    As noted in my testimony, the majority of the enforcement 
actions requiring the retention of an independent consultant 
were put in place as a result of operational and compliance 
deficiencies in community banks. In many of those instances, 
the community bank lacked the necessary expertise and resources 
to correct the problems on their own. The use of independent 
consultants was essential to ensure that the bank took the 
requisite corrective action to operate safely and soundly and 
in compliance with the law. In such circumstances, the 
consultant's expertise, available resources and independence 
from the activity under review were critical factors for the 
success of the engagement. At the conclusion of these 
engagements, the OCC verified that the bank, working with the 
independent consultant, had addressed and corrected the 
violation that gave rise to the requirement in the enforcement 
order. These cases raise few, if any, issues concerning 
conflicts and performance and the OCC intends to continue to 
require banks, including community banks, to hire independent 
consultants in appropriate circumstances.
    In these and other more complex cases, it is important to 
ensure that the independent consultant has not been involved in 
the activities under review and has no potential conflicts of 
interest or current or former relationships with the bank that 
indicate that the consultant should not be engaged by the bank. 
These current standards of the OCC, derived from the agency's 
successful past use of independent consultants, will be 
formalized in the guidance together with appropriate additions 
derived from our ongoing evaluation of the use of independent 
consultants and exploration of ways to improve the process.
    The OCC intends to issue the guidance to examiners as a 
Supervisory Memorandum.

Q.2. In your testimony you noted that the ``types and frequency 
of interactions between the OCC, the bank, and the independent 
consultant depend upon the particular facts and circumstances'' 
and that in some cases ``the appropriate oversight may involve 
very limited interaction.'' In light of the issues found during 
the ``expanded oversight'' of consultants' work during the 
Independent Foreclosure Review and reports of consultants' poor 
performance during reviews resulting from poor Bank Secrecy Act 
anti-money laundering compliance, does the OCC see any need for 
changes in its oversight of the work of independent 
consultants?

A.2. In my testimony, I was referring to the range of 
interactions between the OCC, the bank, and the independent 
consultant. I noted that such interactions depended upon the 
particular facts and circumstances covered by the enforcement 
action, the expertise and resources of bank management, and the 
nature of the consultant's engagement. In cases with discrete 
issues and a limited role for the independent consultant, 
``appropriate oversight may involve very limited interaction.''
    A typical example would be an order requiring a community 
bank with insufficient expertise to engage an independent 
consultant to conduct reviews of a bank's loan portfolio until 
the bank is able to demonstrate that it has an effective 
internal asset quality review system. The discrete nature of 
the engagement together with the fact that the OCC regularly 
examines the results of the loan review mean that there is 
limited need for ongoing oversight of the engagement. We would 
reach the same conclusion where we require a community bank to 
engage an independent consultant to address other operational 
or managerial deficiencies. As noted in my testimony, those 
situations account for the majority of the orders issued by the 
OCC requiring the engagement of independent consultants.
    That simple scenario is very different from a more complex 
engagement represented by the Independent Foreclosure Review 
(IFR). As noted in my testimony, the cases involving 
significant consumer harm and law enforcement implications 
require additional oversight and, in the case of the IFR, the 
OCC engaged in an unprecedented level of interaction with the 
independent consultants. The OCC is currently evaluating its 
use of independent consultants in such circumstances and 
exploring ways to improve the process. The conclusions reached 
by the OCC will be reflected in the guidance currently under 
development.

Q.3. While the OCC and the Federal Reserve sought to increase 
transparency in the use of independent consultants in the case 
of the Independent Foreclosure Review by publishing engagement 
letters between servicers and their consultants, in many cases 
redactions removed information that could shed light on the 
consultants' independence and the quality of reviews. For 
instance, in Bank of America's engagement letter with 
Promontory Financial Group, Promontory's more than two and a 
half page conflicts of interest policy (Attachment C) is fully 
redacted. Why was this policy fully removed when it was put in 
place to ensure transparency and quality reviews, and how would 
the affect of disclosing such a policy negatively impact the 
supervisory and enforcement process?

A.3. Only limited proprietary and personal information was 
redacted from the public engagement letters. Examples of 
information that was redacted included: names, titles and 
biographies of individuals; references to proprietary systems 
information; fees and costs associated with the engagement; 
specific descriptions of past work performed by the independent 
consultants for other clients; and negotiated contract terms 
and provisions (such as indemnification provisions, specifics 
of conflict of interest policies, RUST Draft statement of 
work).
    I would note that the OCC made available for review 
unredacted versions of all OCC engagement letters to 
Congressional staff in 2011; several staff representatives 
reviewed these materials onsite at the OCC.

Q.4.1. You stated that banks were required to hire independent 
consultants to conduct Independent Foreclosure Reviews because 
``it is just beyond the means of any Federal banking agency'' 
to conduct a review of this size and scope, and direct hiring 
of consultants by the OCC would be too drawn out because of 
competitive bidding requirements in Federal procurement 
process.
    Would direct contracting between independent consultants or 
outside experts and the OCC improve transparency and mitigate 
conflicts of interest?

A.4.1. The contracting of consultants by the banks directly 
does not, in and of itself, pose concerns for the OCC in terms 
of transparency and conflicts of interest. As we have 
discussed, the OCC has used independent consultants in the past 
with success through its monitoring and oversight of the 
engagements. With respect to the IFR, each of the independent 
consultant engagement letters contained specific language 
stipulating that consultants would take direction from the OCC 
and prohibited servicers from overseeing, directing, or 
supervising any of the reviews.
    The OCC specifically required each consultant to:

   Comply with requirements of the Order and conduct 
        each foreclosure review as independent from any review, 
        study, or other work performed by the servicer or its 
        contractors or agents with respect to the servicer's 
        mortgage servicing portfolio or the servicers' 
        compliance with other requirements of the consent 
        order.

   Ensure its work under the foreclosure review would 
        not be subject to direction, control, supervision, 
        oversight, or influence by the servicer, its 
        contractors, or agents.

   Require immediate notification to the OCC of any 
        effort by the servicer, directly or indirectly, to 
        exert any such direction, control, supervision, 
        oversight, or influence over the independent 
        consultant, its contractors, or agents.

   Agree that the independent consultant is solely 
        responsible for the conduct and results of the 
        foreclosure review, in accordance with the requirements 
        of article VII of the order.

   Pursuant to the monitoring, oversight, and 
        direction of the OCC: 1) promptly comply with all 
        written comments, directions, and instructions of the 
        OCC concerning the conduct of the review, and 2) 
        promptly provide any documents, work papers, materials, 
        or information requested by the OCC, regardless of any 
        claim of privilege or confidentiality.

   Agree to provide regular progress reports, updates, 
        and information concerning the conduct of the 
        foreclosure review to the OCC, as directed.

   Conduct the review using only personnel employed or 
        retained by the independent consultant to perform the 
        work required and not to employ services provided by 
        the servicer's employees, contractors, or agents unless 
        the OCC provides written approval.

   Adhere to requirements with respect to 
        communication with the servicer, which provide for the 
        independent consultant to use documents, materials, or 
        information provided by the servicer, and to 
        communicate with the servicer, its contractors, or 
        agents, to conduct the review. Within these limits, 
        agree that servicers' employees may not influence or 
        attempt to influence determinations of the consultant's 
        findings or recommendations.

   Agree that legal advice needed in conducting the 
        review shall be obtained from the outside law firm 
        whose retention to advise the independent consultants 
        has been approved by the OCC and not to obtain legal 
        advice (or other professional services) in conducting 
        the review from the servicers' inside counsel, or from 
        outside counsel retained by the servicer or its 
        affiliates to provide legal advice concerning the 
        Order, or matters contained in the Order.

    Accordingly, under the IFR independent consultants took 
their direction from the OCC and Federal Reserve Board (FRB), 
not the servicers; and in one case the OCC directed the 
servicer to terminate an independent consultant (IC) for 
compromising the IFR independence standards. Further, the OCC 
and FRB had direct, in some cases daily, access to the ICs and 
unfettered access to the independent consultant's work and 
reporting. Thus, the concerns regarding the structure of the 
IFR did not emanate from a lack of direct control or authority 
over the independent consultants and did not hinder 
transparency by any means.

Q.4.2. If so, what additional authority would the OCC need to 
enter into direct contracts in a timely manner?

A.4.2. Congress could provide the OCC with additional authority 
for streamlined contracting that would allow the OCC to award 
one or more contracts without justifying the lack of 
competition i.e., exempt such contracts from the Competition in 
Contracting Act, 41 U.S.C.  253. This authority could be used 
during the examination and enforcement process for unusually 
complex or time sensitive matters.

Q.5. Will homeowners who have been wrongfully foreclosed upon 
have their credit reports cured as part of the settlement? Will 
anything be done to correct consumers' credit histories?

A.5. The Amendments to the Consent Orders do not provide for 
determinations of ``harm'' or ``no harm'' on individual cases, 
except in a few limited categories (Servicemembers Civil Relief 
Act and Borrower Not in Default); thus, there are no 
determinations of errors on individual credit reports. 
Borrowers can avail themselves of customer assistance from OCC 
Customer Assistant Group (helpwithmybank.gov), FRB 
(federalreserve.gov), or the CFPB (consumerfinance.gov), where 
applicable, to submit a complaint to support that their credit 
report requires correction due to servicer error, or they may 
choose to work with their servicer directly.
                                ------                                

         RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED 
                     FROM DANIEL P. STIPANO

Q.1. Please provide copies of all contracts, in unredacted 
form, that were executed between the banks subject to the 
consent orders and the consultants they hired, which were 
reviewed and approved by the Office of Comptroller of the 
Currency (OCC) in connection with the Independent Foreclosure 
Review (IFR) process.

A.1. In 2011, upon the publication of the independent 
consultant engagement letters, the OCC made available for 
review unredacted versions of all OCC engagement letters to 
Congressional staff; several staff representatives reviewed 
these materials onsite at the OCC upon their publication. We 
would be pleased to coordinate with your staff to accommodate 
this same review.

Q.2. Please explain in detail why the OCC decided not to engage 
consultants directly to conduct the foreclosure review process. 
Please identify by name the offices, departments, and employees 
that participated in this decision. If there are statutes in 
place which prevent direct engagement, please provide the 
relevant citations. In addition, please provide legislative 
suggestions that will give the OCC more flexibility to directly 
engage in the future.

A.2. The OCC considered the option of directly contracting with 
independent consultants and determined that it would be more 
appropriate and timely to have the servicers contract directly 
with the consultants. This determination resulted from 
discussions among our legal and supervisory divisions. Federal 
Government procurement rules require that the OCC conduct full 
and open competitions for services including the services of 
consultants unless, for example, there is only one source that 
can provide the services or there are urgent and compelling 
circumstances. Even if circumstances are considered urgent and 
compelling, the maximum amount of limited competition is 
required. Given that the services of up to 12 independent 
consultants were needed, competition would have to include more 
than 12 offerors.
    The procurement process requires that the OCC develop a 
request for proposals, advertise its requirements, evaluate 
proposals, negotiate with offerors and make awards. This 
process can be time consuming and, in the case of the 
foreclosure reviews, could have taken as long as 6 to 9 months. 
Because of the number of institutions involved, multiple 
negotiations with offerors would have been necessary. 
Additionally, as with any procurement, an interested party may 
protest at the solicitation, offer or award phase to the U.S. 
General Accountability Office. This adds risk and time to the 
procurement process. Because the full scope of the work for the 
consultants could not be defined up front, it would have been 
difficult for offerors to price their services and for the OCC 
to place a dollar value on the contracts. Also, the OCC 
determined that flexibility in scoping requirements and in 
making changes based on supervisory needs was important and 
that such factors do not easily translate to Federal 
procurement contract types. While there are some contract types 
that allow more flexibility than others, the OCC would have 
been in a position of continuously modifying its contracts to 
ensure the scope of work was correct. The contract risk 
associated with change in scope was, in our opinion, more 
appropriately placed on the entities complying with the consent 
orders rather than the OCC.
    Although the OCC has confidence that outside independent 
consultants can effectively be engaged pursuant to OCC Consent 
Orders, Congress could provide the OCC with additional 
authority for streamlined contracting that would allow the OCC 
to award one or more contracts without justifying the lack of 
competition i.e., exempt such contracts from the Competition in 
Contracting Act, 41 U.S.C.  253. This authority could be used 
during the examination and enforcement process for unusually 
complex or time sensitive matters.

Q.3. Please provide copies of all opinions or memoranda (legal 
or otherwise) that were considered by the OCC that examined 
alternatives to the foreclosure review process eventually 
adopted, including alternatives that considered the agency 
engaging consultants directly to perform the foreclosure 
review.

A.3. The OCC did not prepare any formal analysis, nor generate 
any opinions/memoranda regarding alternatives to the adopted 
foreclosure review process or use of independent third parties 
to conduct the review. The foreclosure examinations conducted 
by OCC examiners during the fourth quarter of 2010 revealed 
situations where servicers may have lacked standing to 
foreclose, may have foreclosed on borrowers in violation of the 
SCRA or U.S. Bankruptcy code, may have charged improper or 
excessive fees with respect to the foreclosure action, or may 
have improperly administered loss mitigation programs--any of 
which may have caused financial harm to the borrower. As a 
result, the OCC determined that certain borrower files should 
be independently reviewed by someone other than the servicer 
itself to determine whether servicer errors resulted in 
borrower financial harm that should be remediated. It has been 
a longstanding practice of the OCC in enforcement actions to 
require banks to engage independent consultants, particularly 
in situations requiring file reviews. Independent consultants 
have subject matter and process knowledge, and they can also 
provide the resources necessary to carry out the task in a 
timely manner. The contracting of consultants by the banks 
directly does not, in and of itself, pose concerns for the OCC 
in terms of transparency and conflicts of interest. With 
respect to the IFR, each of the independent consultant 
engagement letters contained specific language stipulating that 
consultants would take direction from the OCC and prohibited 
servicers from overseeing, directing, or supervising any of the 
reviews.

Q.4. In testimony provided at the Subcommittee on Financial 
Institutions and Consumer Protection on Thursday, April 11, 
2013, Deputy Chief Counsel Daniel Stipano, acknowledged that 
the OCC had sought and received advice on the advisability of 
the OCC directly hiring consultants to engage in the 
foreclosure review process. Please explain whether the advice 
obtained considered applicable Federal procurement statutes, 
regulations, and guidance. If so, please explain in detail the 
analysis and reasoning behind this advice and what form it 
took. To the extent such advice was in writing, please provide 
these documents.

A.4. Please see responses to Questions 2 and 3 above.

Q.5. Please provide a list of all competitive procurement 
contracts entered into during calendar year 2012 involving the 
OCC.

A.5. A list of all competitive procurement contracts for 
calendar year 2012 is attached as Appendix B.

Q.6. The GAO report published this March on the IFR process 
recommended a series of best practices at the remaining three 
financial institutions who haven't yet settled. Have you 
instituted all of these guidelines (improved sampling, improved 
communication with homeowners, more transparency, etc.) with 
OneWest, Everbank, and Allied? Why or why not?

A.6. Yes, we have taken action related to all three of the 
GAO's recommendations. The first recommendation was to improve 
oversight of sampling methodologies and mechanisms to centrally 
monitor consistency. The OCC has communicated with and 
continues to communicate with the remaining independent 
consultants to ensure consistent sampling methodologies are 
used and that those methodologies conform to the OCC Sampling 
Handbook.
    Another recommendation was to identify and apply lessons 
from the foreclosure review process, such as enhancing planning 
and monitoring activities to achieve goals, as they develop and 
implement the activities under the amended Consent Orders. The 
OCC developed a thorough project plan covering the remaining 
work related to the (1) independent foreclosure review, (2) 
calculation and distribution of payments under the settlement, 
and (3) the additional requirements of the amendments to the 
Consent Orders. Additionally, we have drafted and will 
implement an examination plan that each of the resident teams 
will use to test compliance with the Consent Orders. The 
completion of the examination plan will be overseen by 
headquarters staff and will be supported by a small examination 
team that will work with the resident staffs at each 
institution to ensure the examination plan is implemented 
consistently.
    The final recommendation was to develop and implement a 
communication strategy to regularly inform borrowers and the 
public about the processes, status, and results of the 
activities under the amendments to the consent orders and 
continuing foreclosure reviews. The OCC, working with the FRB, 
continues to execute a communication strategy to provide 
timely, accurate information regarding the IFR, specifically 
the IFR Payment Agreement, codified in the amendments to the 
Consent Orders, which were published on February 28. The 
communication strategy involves actions taken by the IFR 
payment administrator--Rust Consulting, Inc.--as well as 
Federal banking regulators and includes direct outreach to 
affected consumers, mass media, and outreach to community 
groups and Congress.
Direct Outreach
    Direct outreach to affected borrowers has proven to be the 
most effective means of communication through this process. The 
IFR payment administrator sent postcards to all 4.2 million 
eligible borrowers in March 2013 alerting them that they would 
receive a check by mail. On April 12, 2013, the IFR payment 
administrator began sending checks and an accompanying letter 
to eligible borrowers. Checks were sent in a number of waves. 
As of June 7, 2013, more than 3.9 million checks were mailed to 
eligible borrowers worth more than $3.4 billion. As of June 7, 
2013, 2.7 million checks have been cashed or deposited worth 
almost $2.4 billion. According to Huntington Bank, which is 
processing the checks, IFR-related checks are clearing at 
nearly 4 times the rate of their previous experience with 53 
other consumer settlements. The clearing rate demonstrates both 
the importance of this issue to eligible borrowers as well as 
the effectiveness of the outreach and previous awareness 
building activities.
Mass Media
    Mass media efforts involve a variety of communication 
tactics including news releases and media interviews, public 
speeches, Web site material, email, social media, and public 
service announcements (PSA).
    Since January 2013, the OCC has published 11 separate news 
releases regarding the IFR Payment Agreement. Each was provided 
to dozens of relevant reporters, posted to OCC.gov and 
HelpWithMyBank.gov, distributed to more than 34,000 email 
subscribers, distributed through Twitter and Facebook, and made 
available through online syndication (via RSS). For the most 
significant of these news releases OCC used PRNewswires 
multicultural distribution service that provides the news 
release to more than 9,000 outlets throughout the country, 
targeting outlets that serve African American, Asian American, 
Hispanic and Native American communities. These releases were 
translated into both Spanish and Chinese for distribution to 
outlets that provide news in those languages. The PSA 
explaining the IFR Payment Agreement was posted to the OCC Web 
page, translated into Spanish, and included in a toolkit of 
resources provided to community groups and advocates for their 
use.
    Since January 2013, the OCC has also responded to 185 
interviews or media queries to provide background information 
to reporters, highlight key messages, emphasize certain facts, 
or correct public misperceptions regarding the IFR Payment 
Agreement. When announced, the OCC conducted a conference call 
for dozens of members of the press to explain the terms of the 
agreement and answer their questions.
    As a result of these news releases and other media 
activity, there have been nearly 300 news articles in national, 
regional, and local media outlets with an audience of more than 
110 million.
    On January 7, 2013 , the Comptroller of the Currency issued 
a personal statement regarding the IFR Payment Agreement. On 
February 13, 2013, he delivered a public speech explaining the 
IFR Payment Agreement before the Women in Housing and Finance 
group in Washington, D.C. Both the statement and speech were 
released to the public through formal news releases, and the 
press widely covered the Comptroller speech in February.
    The OCC has provided additional information on its Web site 
as a resource to consumers and other interested parties at 
www.occ.gov/independentforeclosurereview. The information 
includes frequently asked questions, IFR Payment Agreement 
details, Consent Orders and amendments, and daily updates on 
the volume and value of IFR-related checks that clear each day. 
At the regulators direction, the IFR payment administrator also 
has provided updated frequently asked questions on its Web site 
at https://independentforeclosurereview.com/settled.aspx and 
important tax-related information for borrowers included in the 
IFR Payment Agreement.
Community and Congressional Outreach
    Since February 2012, regulators have produced five 
nationwide Webinars to familiarize counselors and consumer 
groups with the IFR and later the IFR Payment Agreement. We 
have conducted two Webinars on the Payment Agreement 
specifically. The Webinars are posted on the agencies' Web 
sites along with transcripts in English and Spanish.
IFR
   February 2012--IFR: Helping Homeowners Request a 
        Review

   March 2012--IFR: Helping Homeowners Request a 
        Review

   September 2012--IFR: What You Need to Know
IFR Payment Agreement
   March 2013--IFR: Important Changes

   May 2013--IFR: Important Changes

    Consumer and counseling groups were central to developing 
and implementing the Phase II marketing plan for the IFR. 
Regulators have used this same network to provide information 
on the IFR Payment Agreement, creating a toolkit of 
information, available on each regulator's Web site, that 
includes detailed information about the agreement itself, what 
will happen next for borrowers and, additional marketing 
material. The Comptroller and senior OCC staff have met 
numerous times with community groups and consumer advocates 
during this process and will continue to engage these important 
stakeholders.
    The OCC has placed a high priority on ensuring that Members 
of Congress and their staff have timely and accurate 
information about the implementation of the amended Consent 
Orders. To this end, we have held numerous communications, 
including meetings, phone calls, letters and emails, with 
Members of Congress and their staff from the initial 
announcement of the agreement in principle and throughout the 
implementation of the amendments to the Consent Orders. We have 
provided timely responses to questions and concerns, and sought 
feedback from the Members and staff to factor into decisions we 
were making about the implementation of the settlement and 
future reports. Finally, we routinely share public information 
including statements and press releases with Congress so they 
can remain current on the status of the settlement actions and 
provide information to their constituents where they deem 
appropriate.
Going Forward
    The OCC recognizes the importance of continuing to provide 
timely, accurate information to all stakeholders in the process 
and will continue to use mass media and other outreach to keep 
stakeholders informed. Specifically, the OCC is in the process 
of determining content and timing of public reports to provide 
additional relevant information to the public and external 
stakeholders. In determining theses reports, the OCC is 
considering input from a variety of stakeholders including 
community groups and consumer advocates, Congress, and 
industry. When publicizing these reports, the OCC plans to uses 
news release, media outreach, social media, and subscription 
servicers to provide the widest possible distribution and 
greatest possible awareness. These reports will address both 
the IFR Payment Agreements, the status of reviews for servicers 
who did not join the agreements, and servicer compliance with 
other articles of the original foreclosure-related Consent 
Orders published in April 2011.
    The OCC has already instituted daily updates on the number 
and value of IFR-related checks to its Web site and social 
media sites. In addition, the agency has instituted weekly news 
releases to highlight this information.
    Because access to borrower records used in the conduct of 
the IFR is of great interest to borrowers, advocates, and 
Congress, the OCC is working with Federal banking regulators to 
increase consumer awareness of their right to certain 
information by submitting a qualified written response under 
the Real Estate Settlement Procedures Act (RESPA). The OCC 
plans to issue letters to the IFR payment administrator and 
participating servicers that such factual information requested 
by the borrower should be provided under RESPA. In addition, 
the OCC is planning a news release and PSA to increase 
awareness of this process, and is inviting other Federal 
banking regulators to join the release and PSA.
                                ------                                

 RESPONSE TO WRITTEN QUESTIONS OF SENATOR MENENDEZ FROM DANIEL 
                           P. STIPANO

Q.1. I led the efforts in the Senate to request that the 
Government Accountability Office assess the independence, 
transparency, accountability, and consistency of the 
independent foreclosure review process. One of the concerns 
I've had since the beginning of the IFR process is whether the 
Federal Reserve and OCC were sufficiently contacting those in 
our underserved communities. I know there were several 
marketing efforts made throughout the process to improve 
outreach, but from my understanding, there were certainly 
deficiencies in these efforts. With the payouts announced this 
week, it appears that in some cases many of the borrowers who 
requested a review will receive almost twice the payout as 
those who did not request a review. With the issues surrounding 
the IFR's outreach efforts, does this mean those in our 
underserved communities, who were not contacted or made aware 
of the independent review, get will get less money? Why are we 
giving more to those who were contacted and less to those who 
were not contacted, when we know there were major hurdles to 
finding affected borrowers?

A.1. The efforts undertaken to publicize the IFR were 
unprecedented. The $35 million campaign exposed more than 130 
million people to IFR messages at least four times during the 
campaign. The outreach effort was tested and monitored. General 
awareness of the campaign increased from approximately 30 
percent, under the initial marketing efforts, to more than 50 
percent, under the expanded outreach, among those likely to be 
in the in-scope population. This level of awareness typically 
requires four years of advertising to accomplish.
    Borrowers who made an effort to submit a Request for Review 
had an expectation that they would receive an individualized 
review and in some cases they may have gone to efforts to 
locate documents and support to accompany their Request for 
Review. Thus, both FRB and OCC felt it necessary to recognize 
the efforts of borrowers who submitted a Request for Review and 
who believed they were financially injured.

Q.2. The agreement reached by the OCC and Federal Reserve with 
the 13 mortgage servicers provides roughly $5.7 billion in 
foreclosure prevention assistance (or soft money) and $3.6 
billion in cash payments, which will certainly help the 
millions of borrowers. Because of the deficiencies and issues 
that we read about in the GAO study, I'd like to get a better 
understanding of how these dollar amounts (both soft dollars 
and cash payout) were determined, because it seems as though we 
still do not have a solid understanding of the level of harm to 
borrowers. In fact, the new agreement that replaced the 
foreclosure review with a compensation framework does not rely 
on determinations of whether borrowers suffered financial harm. 
So can you explicitly explain how these amounts were 
determined?

A.2. The amounts were negotiated. The $3.6 billion in cash 
payments was informed by several considerations, including the 
remaining amount of projected IC costs to finish the reviews, 
other direct costs associated with finishing the reviews (such 
as the administrator costs), and the projected payments that 
may have been paid to borrowers for harm findings had the 
reviews been completed. We believe the $3.6 billion is several 
times the projected amount that may have been paid out for harm 
under the IFR.
    The $5.7 billion in foreclosure prevention action credit 
will result in meaningful relief to borrowers still struggling 
to keep their homes, and this assistance can make a real 
difference for those families and their communities. However, 
this requirement should not be viewed in isolation. The $5.7 
billion was intended to be an additional incentive to servicers 
to enhance their foreclosure prevention actions and compliments 
the incentives provided by HAMP and similar programs, the 
National Mortgage Settlement, and the State AGs. Similarly, 
this requirement also complements other parts of our Consent 
Orders, which have numerous and significant requirements 
addressing loss mitigation and foreclosure prevention 
activities. These items require servicers to achieve and 
maintain effective loss mitigation and foreclosure prevention 
activities, and we will ensure that objective is met.

Q.3. The agreement reached by the OCC and Federal Reserve with 
the 13 mortgage servicers provides $5.7 billion in foreclosure 
prevention assistance (or soft dollars), which will certainly 
help the millions of affected borrowers. However, my 
understanding is that if one of these servicers does a loan 
modification or principle reduction for $10,000, and the home 
is worth $250,000, the servicer will be credited $250,000 in 
foreclosure prevention assistance or consumer relief under the 
settlement, instead of just $10,000 for the loan modification 
or principle reduction. Are we giving the mortgage servicers 
credit for financial assistance that they didn't necessarily 
provide? Do you plan to continue this practice moving forward? 
Can you explain the policy behind crediting these servicer 
dollar-for-dollar for consumer relief?

A.3. The Amendments to the Consent Orders, which implemented 
the IFR settlement, are specific about the standards the 
regulators will use to measure the servicers' performance on 
loss mitigation and foreclosure prevention. They emphasize 
sustainable and meaningful home preservation actions for 
qualified borrowers and that preference should be given to 
activities designed to keep borrowers in the homes or otherwise 
provide significant and meaningful assistance to qualified 
borrowers.
    The unpaid principal balance (UPB) is straightforward, 
transparent, and an easily measurable barometer of the value of 
the foreclosure that was prevented. It does not measure the 
expense of the action taken or the economic benefit for the 
consumer, but simply measures the foreclosure that was 
prevented based on what the borrower owes, which therefore 
reflects the amount of assistance received. Complicated 
crediting formulas are not transparent, and people tend to find 
ways to manipulate complicated formulas, which can often have 
unintended consequences. Further, sustainable modifications 
come in numerous forms, not only through principal reductions, 
but also through, for example, reduced interest rates.
    Finally, the OCC will focus on the overall efforts and 
results of the loss mitigation and foreclosure prevention 
programs of each servicer as we evaluate compliance with the 
remainder of the Amendments to the Consent Orders. In doing so, 
we will evaluate the effectiveness of all servicer loss 
mitigation and foreclosure prevention activities, not just 
those they request credit for under the Amendments to the 
Consent Orders. We intend to ensure that loss mitigation 
efforts will be done in a manner consistent with the principles 
we described in the Amendments to the Consent Orders.

Q.4. Many of the borrowers who were part of the IFR still live 
in their homes, but I'm concerned about their ability to stay 
in their homes as part of the IFR Payout and consumer relief. 
For example, I believe actions such as principal reductions and 
loan modifications will help keep these people in their homes, 
but short sales would remove these borrowers from their homes. 
What steps have you taken, and will you take, to ensure that 
the soft dollars are used to keep people in their homes? What 
procedures and/or mechanisms are in place to discourage the 
servicers from providing relief through short sales?

A.4. Well-structured loss mitigation actions should focus on 
foreclosure prevention, which should typically result in 
benefiting the borrower and reducing loss. A servicer's 
foreclosure prevention actions should reflect the following 
guiding principles: (a) preference should be given to 
activities designed to keep the borrower in the home; (b) 
foreclosure prevention actions should emphasize affordable, 
sustainable, and meaningful home preservation actions for 
qualified borrowers; (c) foreclosure prevention actions should 
otherwise provide significant and meaningful relief or 
assistance to borrowers; and (d) foreclosure prevention actions 
should not disfavor a specific geography within or among States 
or discriminate against any protected class of borrowers.
    While the amendments to the Consent Orders express the 
priority of such efforts, it is important to recognize that 
different borrowers can benefit from different actions. While 
effective loan modifications help populations seeking to retain 
ownership of their home, other actions, including simplified 
short sales, can provide important benefits to other borrowers, 
including those who cannot be assisted through modification. 
Therefore, the evaluation must be made based on the facts and 
circumstances of each borrower, and cannot be prescribed in 
advance. The OCC will assess the overall effectiveness of the 
servicer's loss mitigation and foreclosure prevention 
activities as we test compliance with the Consent Orders.

Q.5. The GAO reports on the IFR cite little stakeholder 
consultation within the IFR process. While some access to 
Treasury HAMP officials was cited as being helpful in providing 
information on loss mitigation and loan modification, why 
wasn't there a greater focus on using housing counseling 
agencies that have much more experience working through the 
difficult and time consuming process of foreclosure 
modifications than most big consulting firms?

A.5. The OCC and FRB sought extensive input from community 
groups, including groups providing access to housing counseling 
services, throughout the IFR process. Since November 2011, the 
OCC has engaged community groups on numerous topics, such as 
readability, marketing and outreach, resources for non-English 
speakers, borrower financial injury, and improving 
transparency. A number of changes to the IFR process, including 
but not limited to, revisions to the draft Financial 
Remediation Framework, the expanded marketing campaign, 
additional in-language resources, and servicer funding provided 
to community groups, all occurred as a direct result of the OCC 
and FRB's extensive interactions with community group 
stakeholders. A listing of these efforts can be found attached 
hereto as Appendix A.

Q.6. One of the main purposes of the IFR process was to have 
data to enable the OCC and Federal Reserve Board to tell 
whether a bank had a particular kind of file or type of mistake 
that it was repeating, so the consultants could dig deeper into 
their other files. Since the OCC and Federal Reserve abandoned 
the review, to what extent will they be able to further examine 
whether certain banks committed systematic errors in their 
foreclosures based on either preliminary results or based on 
information that they gathered through regular bank 
examinations or other sources?

A.6. The OCC has learned a great deal about the nature of 
servicer errors through the horizontal examinations that were 
the basis for our Consent Orders, the work done by the 
independent consultants, and the examination work we have 
completed since the Consent Orders were executed. We have used 
this knowledge as we have assessed changes in servicing 
practices, and we will also use that knowledge as we evaluate 
the servicer's compliance with the Amendments to the Consent 
Orders.

Q.7. The Foreclosure Review Payment Agreement provides $125,000 
to those most harmed by these foreclosure abuses, and at least 
$300 to those who may not have been harmed at all. Can you 
specifically explain how these payments will be administered 
and what steps will be taken by the OCC and FRB to ensure that 
borrowers receive the relief they need? Specifically, how are 
we administering these thousands, sometimes over a hundred 
thousand dollars, to these borrowers? What types of mechanisms 
are in place to ensure transparency and accountability?

A.7. As of June 7, 2013, more than 2.7 million borrowers have 
cashed or deposited nearly $2.4 billion in checks related to 
the IFR Payment Agreement. The total number of checks sent 
through this date is more than 3.9 million and worth more than 
$3.4 billion.
    According to Huntington Bank, the IFR Payment Agreement 
check cash rate is four times that of their historical 
experience for other consumer-related class action settlements.
    The OCC has committed to providing public reports regarding 
the receipt of payments under the agreement.

Q.8. The National Mortgage Settlement and Independent 
Foreclosure Review addressed foreclosure abuses by many large 
mortgage servicers from 2009-2010. Now that we have two 
distinct avenues of relief for these borrowers, what mechanisms 
are in place to ensure there is no overlap in assisting these 
borrowers? Or of more concern to me, what steps are in place to 
ensure that no borrowers are left behind?

A.8. Pursuant to the terms of the Amendments to the April 13, 
2011 Consent Orders, foreclosure prevention action for which 
the servicers seek credit for must be ``in addition to'' any 
foreclosure prevention action for which the servicer has sought 
credit for under the National Mortgage Settlement. Servicers 
are expressly prohibited from any double counting under the 
Amendments to the Consent Orders.
    Also, the April 13, 2011 Consent Orders require servicers 
to achieve and maintain effective loss mitigation and 
foreclosure prevention programs. Additionally, the Amendments 
to the Consent Order provide guiding principles for foreclosure 
prevention activities, which emphasize affordable, sustainable, 
and meaningful home preservation actions, or other significant 
and meaningful assistance for qualified borrowers.

Q.9. In their April 2013 report, the Government Accountability 
Office states that the uniqueness of each servicer's population 
and their processes for keeping borrowers' information posed 
challenges. In fact, the OCC and Federal Reserve Board said it 
was not feasible to design one file review process that would 
apply to all servicers in the IFR, and the consultants would be 
required to tailor their review processes. How do you believe 
the leeway given the consultants to tailor their own reviews, 
without proper guidance, led to the abandonment of the IFR?

A.9. We do not believe the leeway given to consultants to 
tailor their reviews was a significant factor in changing our 
direction. While the independent consultants were employing 
different processes and methodologies, they were working toward 
the same objectives, which were provided in the Consent Orders. 
Further, we do not agree the independent consultants did not 
have proper guidance. The OCC did provide appropriate guidance 
to the independent consultants to help them develop their 
review processes. First, the sections of the April 2011 Consent 
Orders outlining the purpose of the foreclosure review for all 
banks were nearly identical. This similarity in the Consent 
Orders was intended to ensure that the reviews covered the same 
issues and resulted in similar results for similarly situated 
borrowers. Second, between May 2011 and October 2012, the OCC 
and FRB issued 29 joint pieces of guidance to the independent 
consultants on various topics to help them frame the file 
review process and promote consistency in its implementation. 
Certain guidance was designed to be a unifying factor among all 
the reviews by helping ensure that similarly harmed borrowers 
received similar remediation. Other guidance was issued in 
response to similar questions received from multiple 
consultants or examination teams, which oversaw the reviews at 
the local level, to help promote consistency in the reviews.
    For example, guidance on the review for compliance with the 
SCRA was designed to provide consistent results for all 
affected borrowers. In addition to consistent Consent Orders 
and guidance, the OCC implemented regular and robust 
communication mechanisms to help foster consistency in the 
reviews, including regular meetings involving independent 
consultants, servicers, examination team staff overseeing the 
consultants' work, and OCC headquarters and Federal Reserve 
Board staff to discuss challenges with the file review process 
and help promote consistency among the reviews.

Q.10. From May 2011 to October 2012, the OCC and FRB issued 29 
joint pieces of guidance to the consultants, and regulators had 
regular weekly meetings with the consultants to clarify 
guidance. When you continually clarified guidance to the 
consultants, what impact did that have on the loan files that 
had already been reviewed, prior to the new guidance? When 
changes were made to how files should be reviewed, is it 
logical to assume that those changes must be retroactively 
applied to the already reviewed files? Were these previously 
reviewed files reviewed again?

A.10. In most situations, the OCC and FRB issued guidance to 
provide clarity or address inconsistencies in practices among 
some of the independent consultants, with many of the 
consultants already fully complying with the formal guidance. 
For those consultants not fully complying with the guidance, 
change in practice was necessary and, when applicable given the 
nature of the guidance, certain files required some amount of 
re-review. Often, only a portion of a previously reviewed file 
focusing on a specific subject area needed to be re-worked to 
achieve compliance with the guidance rather than are review of 
all aspects of the file.
Appendix A
Engagement with Consumer Groups on the IFR
May 2013
   The OCC began meeting and talking regularly with a 
        cross-section of consumer and legal aid organizations 
        about the Independent Foreclosure Review in November 
        2011. Our series of regular meetings and frequent 
        discussions have informed our decisionmaking in 
        numerous areas, including: marketing and outreach, 
        extension of the deadline for borrowers to request 
        reviews, types of financial harm, and remediation. The 
        groups also offered extensive comments on the IFR 
        Remediation Framework, which was provided to them in 
        draft.

   These frequent meetings and discussions have 
        continued about implementation of the IFR Payment 
        Agreement.

     Two meetings with Americans for Financial Reform 
        (AFR) representatives focused on the Payment Agreement 
        Waterfall. Shared a final draft of the Waterfall for 
        comment prior to finalizing payment determinations.

     Also gathering AFR input on: Reporting on Loss 
        Mitigation/Foreclosure Prevention efforts, IC Findings, 
        and Enforcement of servicing part of the original 
        Consent Order.
Working With Consumer and Counseling Groups on Outreach
   In December 2011, the OCC, FRB, servicers and FSR 
        (on behalf of the servicer consortium) participated in 
        two sessions of the annual NeighborWorks training 
        conference, attended by community group representatives 
        from around the country, to provide information and 
        answer questions about the foreclosure review.

   The OCC met with representatives of the Loan 
        Modification Scam Prevention Network and coordinated 
        introductions to the servicer consortium, resulting in 
        added borrower alerts for fraud or scam activity 
        related to the advertisements, second mailings, and Web 
        site materials.

   Regulators produced five nationwide Webinars to 
        familiarize counselors and consumer groups with the IFR 
        and later the IFR Payment Agreement in order to help 
        the groups assist their constituents. The Webinars are 
        posted on the agencies' Web sites along with 
        transcripts in English and Spanish.
IFR
   February 2012--IFR: Helping Homeowners Request a 
        Review

   March 2012--IFR: Helping Homeowners Request a 
        Review

   September 2012--IFR: What You Need to Know
IFR Payment Agreement
   March 2013--IFR: Important Changes

   May 2013--IFR: Important Changes

   The independent consultants separately held a 
        teleconference and several in-person meetings with 
        consumer group representatives to share foreclosure 
        review information. For example, in May 2012, community 
        group representatives visited the Promontory/Bank of 
        America site to review how reviews are being conducted.

   As part of the Phase I of marketing of the IFR, the 
        OCC worked with servicers to identify ways to provide 
        resources and additional support to advocates to expand 
        their capabilities for promoting participation in the 
        IFR.

   During that phase, Several servicers adopted the 
        regulators' suggestion to provide financial support to 
        advocacy groups to enhance borrowers' familiarity with 
        the IFR initiative. To date, three servicers have 
        supported approximately 15 intermediary organizations 
        with well over 100 member organizations servicing 
        communities across the country. By design, the support 
        permits maximum flexibility to tailor outreach 
        activities best suited for the diverse clienteles the 
        organizations serve. Groups have issued direct 
        mailings, emails, and mass flyers, held conferences and 
        workshops, conducted outreach at street fairs, offered 
        individual and group counseling sessions, collaborated 
        with other community organizations, and leveraged 
        faith-based partnerships to expand IFR awareness.

   Groups also supplied two toll-free phone lines (one 
        specifically for Spanish speakers) and at least 13 
        informational Web sites on the IFR. They also released 
        two videos and issued several press releases. Other 
        assisted borrowers in requesting and completing the 
        form and assembling supplementing information and 
        documents. Groups have also prepared advertising in 
        several Asian languages and developed IFR information 
        materials in languages such as Hmong, Vietnamese, 
        Korean, Russian, Tagalog, and Mandarin Chinese.

   Consumer and counseling groups were central to 
        developing and implementing the Phase II marketing plan 
        for the IFR. In August 2012, regulators brought 
        together consumer and counseling groups in August such 
        as--HomeFree USA, Neighborworks America, National Fair 
        Housing Alliance, National Council of LaRaza, to help 
        develop the plan.

   Building on group participation during Phase I, the 
        second phase dedicated $5 million to fund 16 groups, 
        covering 70 markets. Groups used an online toolkit with 
        creative materials to: conduct mailings and outbound 
        calling to their client data bases, assist borrower in 
        retrieving documents and completing the IFR forms, 
        conduct grass roots outreach activities--events, 
        speaking engagements, and panels, engage community 
        partners to disseminate information, and engage church 
        community through pastoral messaging, church 
        newsletters, flyer distributions and post-service 
        gatherings/ministries.

        
        
RESPONSE TO WRITTEN QUESTIONS OF CHAIRMAN BROWN FROM RICHARD M. 
                             ASHTON

Q.1. In response to a question regarding current standards for 
determining the independence of consultants hired by financial 
institutions, Mr. Stipano of the OCC stated that the OCC had 
not ``reached the point of putting pen to paper'' to outline 
its policies for a consultant's independence.
    Has the Federal Reserve also considered developing written 
policies for independence of consultants retained in compliance 
with enforcement actions?
    If so, have you considered the procedure to develop those 
requirements, including the factors to be considered, the 
parties to be consulted, and the timeline for rules, and will 
this policy be available for review by financial firms, 
consulting firms, Members of Congress, and the public? If not, 
why not?

A.1. As the Board's recent testimony before the Senate Banking 
Committee's Subcommittee on Financial Institutions and Consumer 
Protection stated, our consistent practice has been to oversee 
the selection and performance of consultants that are required 
to be retained by a Federal Reserve-regulated institution to 
carry out specific functions on behalf of the institution under 
an enforcement action. This oversight includes approving the 
selection of a particular consultant, which requires a review 
of the consultant's prior work for the institution to assess 
potential conflicts of interest, and a determination that the 
consultant will have appropriate qualifications and separation 
from the institution's management. We also monitor the 
consultant's performance during the course of the engagement 
through ongoing communications and meetings as appropriate. 
Throughout the course of our oversight, we apply the same 
supervisory expectations as if the institution were performing 
the work directly. As stated in the Board's testimony, these 
standards for overseeing consultants' conduct of a specific 
engagement are applied on a case-by-case basis, so that a 
consultant's performance can be measured in light of the 
specific kind of function that the consultant must carry out.
    Financial institutions supervised by the Federal Reserve 
are only infrequently required in an enforcement action to 
retain consultants to carry out specific functions on behalf of 
the institution. In the vast majority of cases, the financial 
institution itself, using its own personnel and resources, 
takes the necessary corrective and remedial measures under the 
enforcement action. The Federal Reserve is evaluating the use 
of consultants in enforcement matters and is considering the 
appropriate role for consultants and whether the current 
oversight standards should be incorporated into written public 
guidelines.

Q.2. In your testimony you provided a list of supervisory 
actions that can be taken by the Federal Reserve to monitor 
independent consultants. In light of the issues found during 
what the OCC termed the ``expanded oversight'' of consultants' 
work during the Independent Foreclosure Review and reports of 
consultants' poor performance during reviews resulting from 
poor Bank Secrecy Act anti-money laundering compliance, does 
the Federal Reserve see any need for changes or increased 
consistency in its oversight of the work of independent 
consultants?

A.2. In those enforcement actions that require retention of a 
consultant, the Federal Reserve applies the same standards as 
if the regulated institution was performing the function 
directly and has the authority to require the regulated 
institution to replace the consultant and can take appropriate 
formal enforcement action against the consultant and the 
regulated institution as appropriate.
    The role of the consultants in the Independent Foreclosure 
Review (IFR) of individual borrower files required under the 
recent enforcement actions against the major residential 
mortgage servicers was significantly different than in the 
typical enforcement action undertaken by the Federal Reserve. 
We are now implementing all of the recommendations of a recent 
report of by the Government Accountability Office (GAO) on the 
oversight of consultants during the IFR in our continuing 
oversight of the remaining institutions that are still 
conducting a foreclosure review. We will also consider the GAO 
recommendations in overseeing future enforcement actions.

Q.3. While the OCC and the Federal Reserve sought to increase 
transparency in the use of independent consultants in the case 
of the Independent Foreclosure Review by publishing engagement 
letters between servicers and their consultants, in many cases 
redactions removed information that could shed light on the 
consultants' independence and the quality of reviews. For 
instance, in Bank of America's engagement letter with 
Promontory Financial Group, Promontory's more than two and a 
half page conflicts of interest policy (Attachment C) is fully 
redacted. Why was this policy fully removed when it was put in 
place to ensure transparency and quality reviews, and how would 
the effect of disclosing such a policy negatively impact the 
supervisory and enforcement process?

A.3. Information regarding conflicts of interest policies was 
not redacted from engagement letters between the servicers we 
regulate and the consultants retained by those servicers to 
conduct the IFR when these letters were publicly disclosed by 
the Federal Reserve on its Web site at www.federalreserve.gov/
consumerinfo/independent-foreclosurereview.htm. The published 
letters describe the methodology the consultants had to follow 
in reviewing borrower files to identify financial injury, the 
protocols the consultant had to follow to maintain sufficient 
independence from the servicer in carrying out the IFR, and 
other details concerning the IFR. Small portions of each letter 
were redacted in the published version only when necessary to 
protect, for example, proprietary financial information of the 
parties, such as the identity of proprietary data management 
systems or specific fee schedules charged by the consultants, 
and information that could compromise personal privacy, such as 
the names of the specific individuals who were involved in the 
foreclosure review at the servicer and at the consultant. 
Because mortgage servicing activities by the Bank of America 
Corporation are conducted by its national bank subsidiary, the 
engagement letter related to the IFR at the Bank of America was 
approved and disclosed by the Office of the Comptroller of the 
Currency, not the Federal Reserve.
                                ------                                

         RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED 
                     FROM RICHARD M. ASHTON

Q.1. Please provide copies of all contracts, in unredacted 
form, that were executed between the banks subject to the 
consent orders and the consultants they hired, which were 
reviewed and approved by the Board of Governors of the Federal 
Reserve (Federal Reserve) in connection with the Independent 
Foreclosure Review (IFR) process.

A.1. The Federal Reserve published the engagement letters 
between the servicers we regulate and the consultants retained 
by those servicers to conduct the Independent Foreclosure 
Review (IFR) on its Web site at www.federalreserve.gov/
consumerinfo/independentforeclosure-review.htm. The published 
letters describe the methodology the consultants had to follow 
in reviewing borrower files to identify financial injury, the 
protocols the consultant had to follow to maintain sufficient 
independence from the servicer in carrying out the IFR, and 
other details concerning the IFR. Small portions of each letter 
were redacted in the published version only when necessary to 
protect, for example, proprietary financial information of the 
parties, such as the identity of proprietary data management 
systems or specific fee schedules charged by the consultants, 
and information that could compromise personal privacy, such as 
the names of the specific individuals who were involved in the 
foreclosure review at the servicer and at the consultant.

Q.2. Please explain in detail why the Federal Reserve decided 
not to engage consultants directly to conduct the foreclosure 
review process. Please identify by name the offices, 
departments, and employees that participated in this decision. 
If there are statutes in place which prevent direct engagement; 
please provide the relevant citations. In addition, please 
provide legislative suggestions that will give the Federal 
Reserve more flexibility to directly engage in the future.

A.2. As explained in the Board's recent testimony before the 
Senate Banking Committee's Subcommittee on Financial 
Institutions and Consumer Protection, in the vast majority of 
Federal Reserve enforcement actions, the organization itself, 
using its own personnel and resources, is directed to take the 
necessary corrective and remedial action. In appropriate 
circumstances, the Federal Reserve has found that it can be an 
effective enforcement tool to require regulated organizations 
to retain a consultant to perform specific tasks on behalf of 
that organization that the organization should perform itself, 
but has shown it cannot do. Where consultants are used, they 
work on behalf of the regulated organization. Consequently, 
their expenses are appropriately borne by the regulated 
organization, and not by the taxpayers.
    The decision to require the banking organizations to retain 
a consultant to conduct the IFR was based our prior experience 
in formal enforcement actions. In a small percentage of these 
actions, a consultant retained by the institution involved was 
directed to make discrete factual determinations on behalf of 
the institution, such as deciding whether a Bank Secrecy Act 
filing was made with respect to a particular transaction. This 
technique had proven to be effective, and we believed at the 
time of the execution of the mortgage servicing orders that the 
same approach would be workable with regard to the examination 
of individual borrower files under the IFR. The consent orders 
requiring the retention of consultants to conduct the IFR were 
approved by senior staff in the legal and bank supervisions 
areas under regulations delegating such approval authority to 
the staff. Prior to exercising this authority, Board staff 
consulted members of the Board.
    The Federal Reserve has authority to retain its own 
independent contractors such as consultants, and has no 
suggestions for legislative initiatives in this area at this 
time.

Q.3. Please provide copies of all opinions or memoranda (legal 
or otherwise) that were considered by the Federal Reserve that 
examined alternatives to the foreclosure review process 
eventually adopted, including alternatives that considered the 
agency engaging consultants directly to perform the foreclosure 
review.

A.3. Please see answer to Question #2.

Q.4. In testimony provided at the Subcommittee on Financial 
Institutions and Consumer Protection on Thursday, April 11, 
2013, Deputy Chief Counsel Daniel Stipano, acknowledged that 
the OCC had sought and received advice on the advisability of 
the OCC directly hiring consultants to engage in the 
foreclosure review process. Did the Federal Reserve also seek 
and receive such advice? If so, please explain whether the 
advice obtained considered applicable Federal procurement 
statutes, regulations, and guidance. In addition, please 
explain in detail the analysis and reasoning behind this advice 
and what form it took. To the extent such advice was in 
writing, please provide these documents.

A.4. The Federal Reserve decided not to directly retain 
consultants for the reasons discussed in the answer to Question 
#2 above.

Q.5. Please provide a list of all competitive procurement 
contracts entered into during calendar year 2012 involving the 
Federal Reserve.

A.5. I have been advised that the Board entered into about 500 
contracts during 2012 using competitive acquisition methods. 
Information on whether any particular contract was awarded 
competitively can be provided on request.

Q.6. The GAO report published this March on the IFR process 
recommended a series of best practices at the remaining three 
financial institutions who haven't yet settled. Have you 
instituted all of these guidelines (improved sampling, improved 
communication with homeowners, more transparency, etc.) with 
OneWest, Everbank, and Allied? Why or why not?

A.6. The Government Accountability Office's (GAO) April 13, 
2013 report, ``Foreclosure Review: Lessons Learned Could 
Enhance Continuing Reviews and Activities under Amended Consent 
Orders'' (13-550T), recommends three actions for the Federal 
Reserve and the Office of the Comptroller of the Currency (OCC) 
to take as a result of the GAO's review of the IFR. The Federal 
Reserve has taken significant steps to implement each of the 
recommended actions.
    The GAO's first recommendation is for the agencies to 
improve oversight of sampling methodologies and mechanisms to 
centrally monitor consistency, such as assessment of the 
implications of inconsistencies on remediation results for 
borrowers in the remaining foreclosure reviews. On July 26, 
2013, the Federal Reserve amended its consent order against the 
one firm supervised by the Federal Reserve that was continuing 
to conduct an IFR, GMAC Mortgage, to incorporate an agreement 
to provide payments to borrowers in lieu of the IFR. This 
amendment is similar to those announced in early 2012 with 
respect to the other servicers that are participating in the 
payment agreement. Thus, concerns relating to consistency in 
the further conduct of the IFR are no longer an issue with 
respect to Federal Reserve-regulated servicers.
    The GAO's second recommendation is that the agencies 
identify and apply lessons learned from the foreclosure review 
process, such as enhancing planning and monitoring activities 
to achieve goals, in particular as the agencies develop and 
implement the activities under the amendments to the consent 
orders. The amended consent orders substituted an agreement to 
make payments to all in-scope borrowers and terminated the IFR 
at those institutions that accepted the amendments. The Federal 
Reserve, in coordination with the OCC, significantly expanded 
its planning and monitoring efforts during the course of the 
IFR and continues to devote resources to planning and 
monitoring the implementation of the remaining requirements of 
the amendments to the consent orders. Similarly, the Federal 
Reserve has devoted resources to advanced planning with respect 
to public reporting on the IFR, and on implementation of the 
remaining amendments to the consent orders.
    The GAO's third recommendation is focused on the 
development of a communication strategy to regularly inform 
borrowers and the public about the processes, status, and 
results of the activities under the amendments to the consent 
orders and continuing foreclosure reviews. The Federal Reserve 
and the OCC are implementing a communications strategy to 
ensure that borrowers are aware of the amendments to the 
consent orders. These actions include sending an initial 
notification to the approximately 4.2 million borrowers covered 
by the amended consent orders that payments were going to be 
sent; a Webinar directed at community groups and other 
interested members of the public to explain the process for 
distributing checks; and a letter to borrowers to accompany the 
payments that explains relevant facts about the payments. In 
addition, the OCC and the Federal Reserve sent a letter to 
borrowers who submitted a request for review form and whose 
servicers at that time were completing the IFR advising them 
that their servicer is not a party to the amendments to the 
consent orders and that the review the borrower requested 
continues and remains in process.
                                ------                                

RESPONSE TO WRITTEN QUESTIONS OF SENATOR MENENDEZ FROM RICHARD 
                           M. ASHTON

Q.1. I led the efforts in the Senate to request that the 
Government Accountability Office assess the independence, 
transparency, accountability, and consistency of the 
independent foreclosure review process. One of the concerns 
I've had since the beginning of the IFR process is whether the 
Federal Reserve and OCC were sufficiently contacting those in 
our underserved communities. I know there were several 
marketing efforts made throughout the process to improve 
outreach, but from my understanding, there were certainly 
deficiencies in these efforts. With the payouts announced this 
week, it appears that in some cases many of the borrowers who 
requested a review will receive almost twice the payout as 
those who did not request a review.
    With the issues surrounding the IFR's outreach efforts, 
does this mean those in our underserved communities, who were 
not contacted or made aware of the independent review, get will 
get less money? Why are we giving more to those who were 
contacted and less to those who were not contacted, when we 
know there were major hurdles to finding affected borrowers?

A.1. The Office of the Comptroller of the Currency (OCC) and 
the Federal Reserve took extensive steps to help ensure that 
all borrowers covered by the Independent Foreclosure Review 
(IFR) were contacted as part of that process and provided an 
opportunity to request a review of their foreclosure. To 
address concerns expressed by Members of Congress and 
recommendations made by the Government Accountability Office 
(GAO), the agencies developed a variety of outreach tools to 
broaden the reach of efforts to contact borrowers to advise 
them of the process for seeking a foreclosure review. These 
tools included targeted television and radio and print media 
advertising, using trusted representatives to assist in 
reaching borrowers who were likely to have been missed by other 
outreach efforts, use of agency public service announcements, 
Webinar with consumer groups, and additional direct mail 
solicitations in multiple languages.
    The agreement with most of the servicers conducting the IFR 
that required payments to all borrowers covered by the IFR in 
lieu of continuing the review of individual borrower files did 
not condition payments on whether or not a borrower was 
contacted as part of the IFR process. The amounts paid to 
individual borrowers under this payment agreement were 
determined by the OCC and Federal Reserve after consultation 
with various consumer advocacy groups. Under the approved 
schedule of payments, in most cases, borrowers who requested a 
review of their foreclosure by an independent consultant under 
the IFR received a somewhat larger amount than borrowers in the 
same category who did not submit a request for review. The 
regulators believed that those individuals who affirmatively 
claimed that they were injured by servicer errors should 
receive some preference in allocation of the payment agreement 
funds.
    Our review of data comparing the locations where mailings 
to in-scope borrowers were sent, the locations from which 
requests for review have been received, and 2010 Census Data 
indicates that the percentage of borrowers in low- and 
moderate-income zip codes and in zip codes where racial 
minorities comprised the majority of the population who 
submitted requests for review was generally not lower than the 
percentage of in-scope borrowers submitting review requests in 
all locations nationwide.

Q.2. The agreement reached by the OCC and Federal Reserve with 
the 13 mortgage servicers provides roughly $5.7 billion in 
foreclosure prevention assistance (or soft money) and $3.6 
billion in cash payments, which will certainly help the 
millions of borrowers. Because of the deficiencies and issues 
that we read about in the GAO study, I'd like to get a better 
understanding of how these dollar amounts (both soft dollars 
and cash payout) were determined, because it seems as though we 
still do not have a solid understanding of the level of harm to 
borrowers. In fact, the new agreement that replaced the 
foreclosure review with a compensation framework does not rely 
on determinations of whether borrowers suffered financial harm. 
So can you explicitly explain how these amounts were 
determined?

A.2. With the OCC taking the lead, the regulators accepted the 
payment agreement with the 13 mortgage servicers because that 
approach would provide payments to more borrowers in a shorter 
time than would have occurred if the IFR had continued at those 
servicers, where most injured borrowers likely would not see 
compensation for some time to come. As you note, the amounts 
paid to individual borrowers under the payment agreement are 
not based on a finding of financial harm to any specific 
borrower. Instead, all borrowers covered by the IFR were 
categorized according to the stage of their foreclosure process 
and the type of possible servicer error. Regulators then 
determined amounts for each category using the financial 
remediation matrix published by the OCC and Federal Reserve in 
June 2012 as a guide, incorporating input from various consumer 
groups. Regulators have published the payment amounts and 
number of borrowers in each category on their Web sites at 
www.occ.gov/independentforeclosurereview and 
www.federalreserve.gov/consumerinfo/independent-foreclosure-
review-paymentagreement.htm.
    The payment amounts for several of the categories, 
including the category for borrowers eligible for protection 
under the Servicemember Civil Relief Act (SCRA), were derived 
from the amounts paid to borrowers under recently negotiated 
settlements involving similar kinds of claims. In deciding to 
accept the payment agreement, we looked to see whether the 
total amount available to fund cash payments would be large 
enough to provide borrowers in the highest payment categories, 
such as SCRA borrowers, with significant payouts while allowing 
those borrowers in the lower categories to receive payments in 
amounts commensurate with those specified in the financial 
remediation matrix. We were also aware that the National 
Mortgage Settlement (NMS), which recently had been entered into 
between the five largest servicers and the Department of 
Justice (DOJ) and the State attorneys general, required $25 
billion in cash payments and other relief to borrowers that 
would be in addition to the over $9 billion in payments and 
assistance that would be provided by the servicers that 
participated in the payment agreement. Importantly, the Federal 
Reserve and the OCC ensured that each borrower receiving a 
payment or other assistance under the payment agreement 
retained the right to pursue full remediation through other 
means. This ensured that borrowers who could demonstrate 
greater harm than addressed by the regulators' remediation 
efforts could obtain a court review of those claims and full 
remediation to address unique facts and injuries.

Q.3. The agreement reached by the OCC and Federal Reserve with 
the 13 mortgage servicers provides $5.7 billion in foreclosure 
prevention assistance (or soft dollars), which will certainly 
help the millions of affected borrowers. However, my 
understanding is that if one of these servicers does a loan 
modification or principle reduction for $10,000, and the home 
is worth $250,000, the servicer will be credited $250,000 in 
foreclosure prevention assistance or consumer relief under the 
settlement, instead of just $10,000 for the loan modification 
or principle reduction. Are we giving the mortgage servicers 
credit for financial assistance that they didn't necessarily 
provide? Do you plan to continue this practice moving forward? 
Can you explain the policy behind crediting these servicer 
dollar-for-dollar for consumer relief?

A.3. In addition to direct cash payments totaling $3.6 billion 
to in-scope borrowers, the payment agreement with the 13 
mortgage servicers included a commitment by the servicers to 
provide a total of $5.7 billion of foreclosure prevention 
relief within the next two years. This portion of the agreement 
was modeled on the NMS with the DOJ and the State attorneys 
general. A servicer can receive credit toward meeting this 
commitment by, among other things, providing the kinds of 
foreclosure prevention measures that are eligible to receive 
credit under similar commitments made by the servicers that 
entered into the NMS. These measures include first and second 
lien loan modifications and short sales/deeds in lieu of 
foreclosure. There are a variety of ways in which the economic 
value of these kinds of foreclosure prevention assistance to a 
particular borrower can be estimated, and the payment agreement 
provides crediting for these types of activities based on the 
unpaid principal balance of the affected loan. For example, 
where a servicer provides a borrower with a sustainable loan 
modification that makes the full remaining loan balance 
affordable for the borrower and thus more likely to be repaid, 
so that the borrower is able to remain in the residence 
indefinitely, the remaining loan balance can be viewed as a 
quantification of the value of that modification to the 
borrower. Servicers may also receive credit toward their 
foreclosure assistance commitment by providing other types of 
loss mitigation or other foreclosure prevention actions, 
subject to regulatory non-objection, such as interest rate 
modifications, deficiency waivers, and provision of cash 
payments or other resources to borrower counseling or 
education.

Q.4. Many of the borrowers who were part of the IFR still live 
in their homes, but I'm concerned about their ability to stay 
in their homes as part of the IFR Payout and consumer relief. 
For example, I believe actions such as principal reductions and 
loan modifications will help keep these people in their homes, 
but short sales would remove these borrowers from their homes. 
What steps have you taken, and will you take, to ensure that 
the soft dollars are used to keep people in their homes? What 
procedures and/or mechanisms are in place to discourage the 
servicers from providing relief through short sales?

A.4. The amended consent orders that implement the payment 
agreement with regard to the servicers participating in the 
agreement set forth several guiding principles the servicers 
are to follow in conducting their foreclosure prevention 
activities obligations under the payment agreement. 
Specifically, servicers' foreclosure prevention actions should 
give preference to activities designed to keep the borrower in 
the home; should emphasize affordable, sustainable, and 
meaningful home preservation actions; should otherwise provide 
significant and meaningful relief or assistance to qualified 
borrowers; and should not disfavor particular geographies or 
low- and moderate-income borrowers, or discriminate against any 
protected class. Federal Reserve examiners will monitor the 
foreclosure mitigation activities of those participating 
servicers we regulate in light of these principles and we will 
strongly encourage the servicers to focus on the kinds 
ofassistance that facilitate borrowers retaining their homes.
    Loan modifications are an important tool for keeping 
borrowers in their homes, but are not the best solution for all 
troubled borrowers. Some borrowers are so behind on their 
payments relative to their ability to repay the loan that 
exiting the mortgage altogether is their best option. Other 
borrowers may want to sell their homes in order to move to 
another city where job prospects are better. For these 
borrowers, a short sale is a better way to exit the mortgage 
than a foreclosure. Short sales can be advantageous to 
borrowers because the lender typically forgives the difference 
between the mortgage balance and the short sale proceeds. Short 
sales also impose fewer costs on communities than foreclosures.

Q.5. The GAO reports on the IFR cite little stakeholder 
consultation within the IFR process. While some access to 
Treasury HAMP officials was cited as being helpful in providing 
information on loss mitigation and loan modification, why 
wasn't there a greater focus on using housing counseling 
agencies that have much more experience working through the 
difficult and time consuming process of foreclosure 
modifications than most big consulting firms?

A.5. The Federal Reserve, working with the OCC, has made 
extensive efforts to obtain input on many occasions from 
national consumer and housing counseling groups on a number of 
important issues relating to the IFR and the payment agreement, 
especially after the issuance of the GAO report on the IFR in 
June of last year. Particularly, in expanding our outreach 
efforts to alert in-scope borrowers of the opportunity to 
request a review of their foreclosure by independent 
consultants pursuant to the IFR, we held several meetings with 
consumer groups. We then incorporated their feedback on the 
accessibility of outreach materials into advertisements and 
subsequent mailings to borrowers to improve the accessibility 
and readability of the materials. The Federal Reserve and the 
OCC also conducted outreach sessions targeted at housing 
counseling agencies, including two Webinars and other outreach 
events with local groups at the regional Federal Reserve Banks. 
These sessions provided them with information on the IFR 
process and trained them in assisting borrowers in completing 
the request for review form. In connection with entering into 
with the payment agreement with the servicers in lieu of 
conducting the IFR, we sought input from consumer 
representatives before accepting the agreement. We also met 
with community groups to solicit the groups' views on how best 
to communicate information about the agreement and the payments 
to eligible borrowers they serve. Moreover, the amounts paid to 
individual borrowers under this payment agreement were 
determined by the OCC and Federal Reserve after consultation 
with various consumer advocacy groups.

Q.6. One of the main purposes of the IFR process was to have 
data to enable the OCC and Federal Reserve Board to tell 
whether a bank had a particular kind of file or type of mistake 
that it was repeating, so the consultants could dig deeper into 
their other files. Since the OCC and Federal Reserve abandoned 
the review, to what extent will they be able to further examine 
whether certain banks committed systematic errors in their 
foreclosures based on either preliminary results or based on 
information that they gathered through regular bank 
examinations or other sources?

A.6. A primary focus of the enforcement actions issued by the 
Federal Reserve and the OCC in April 2011 always was and 
continues to be a requirement that the servicers, in addition 
to conducting the file reviews as part of the IFR, correct the 
deficiencies in their servicing and foreclosure processes that 
had been found during a joint onsite review of federally 
regulated mortgage servicers by the banking regulatory agencies 
in 2010. The action plans submitted by Federal Reserve-
regulated servicers to correct these deficiencies have been 
approved and are being implemented by the servicers. As part of 
the ongoing oversight of the servicers we regulate, Federal 
Reserve examiners will review the corrective measures those 
servicers take to ensure the deficiencies do not recur. Thus, 
the change from the IFR process to the current payment 
agreement is not expected to affect the identification and 
correction of deficient foreclosure practices at these 
servicers.

Q.7. The Foreclosure Review Payment Agreement provides $125,000 
to those most harmed by these foreclosure abuses, and at least 
$300 to those who may not have been harmed at all. Can you 
specifically explain how these payments will be administered 
and what steps will be taken by the OCC and FRB to ensure that 
borrowers receive the relief they need? Specifically, how are 
we administering these thousands, sometimes over a hundred 
thousand dollars, to these borrowers? What types of mechanisms 
are in place to ensure transparency and accountability?

A.7. The Federal Reserve, in coordination with the OCC, 
significantly expanded its planning and monitoring efforts 
during the course of the IFR and continues to devote resources 
to planning and monitoring the implementation of the remaining 
requirements of the payment agreement. The agencies have taken 
several steps to enhance their planning and monitoring with 
respect to the cash payments to borrowers and to ensure that 
borrowers are aware of the payment agreement. For example, the 
agencies have:

   Met with and sought feedback from community groups, 
        housing counseling organizations, and other interested 
        stakeholders, and incorporated that feedback into 
        communications to borrowers about the payment 
        agreement. Among the communication steps recommended by 
        the groups and adopted by the agencies was a 
        requirement that the paying agent, Rust Consulting, 
        mail a postcard to the approximately 4.2 million 
        borrowers whose servicers are parties to the payment 
        agreement, to alert borrowers that they would be 
        receiving a payment. The agencies received valuable 
        input that helped improve readability of the mailings 
        to borrowers;

   Developed a letter to borrowers whose servicers are 
        parties to the payment agreement to accompany their 
        payment. This letter contains an explanation about why 
        the borrower is receiving a payment, along with 
        instructions for cashing the check, a statement that 
        the borrower is not required to execute a waiver of any 
        legal claims they may have against their servicer as a 
        condition for receiving payment, and other important 
        disclosures;

   Presented Webinars on March 13, and April 20, 2013, 
        for community groups, housing counselors, and other 
        interested members of the public to explain the 
        provisions of the payment agreement orders; and

   Issued several press releases related to the 
        payment agreement and made publicly available on our 
        Web sites information about how cash payment amounts 
        were determined, the numbers of borrowers falling into 
        the various payment categories, and the schedule for 
        mailing checks to borrowers whose servicers 
        participated in the payment agreement.

    The first wave of payments was issued to borrowers on April 
12, 2013--and additional mailings have been sent on a regular 
schedule since that time. As of July 19, 2013, approximately 
4.2 million checks have been sent to borrowers, worth over $3.5 
billion. As of August 1, 2013, approximately 2.9 million of 
those checks, worth approximately $2.6 billion, have been 
cashed or deposited. The payment agreement is achieving our 
primary objective, which is to get money into the hands of more 
borrowers more quickly than would have occurred had the IFR 
continued.
    In addition, the Federal Reserve has updated its Web site 
with the number and dollar value of checks to borrowers under 
the payment agreement that have been deposited or cashed. The 
Federal Reserve and the OCC have also committed to providing 
public reports that detail the implementation of the amendments 
to the consent orders. We anticipate the reports will include 
available details about the direct relief and other assistance 
provided to homeowners, as well as information about the number 
of requests for review, costs associated with the reviews, and 
the status of the other corrective activities directed by the 
enforcement actions. We are in the process of analyzing this 
information at this time and, as explained above, are taking 
steps to determine how this information may be best presented 
to the public.

Q.8. The National Mortgage Settlement and Independent 
Foreclosure Review addressed foreclosure abuses by many large 
mortgage servicers from 2009-2010. Now that we have two 
distinct avenues of relief for these borrowers, what mechanisms 
are in place to ensure there is no overlap in assisting these 
borrowers? Or of more concern to me, what steps are in place to 
ensure that no borrowers are left behind?

A.8. The IFR and the NMS are separate actions and provide 
different forms of remedies and relief. The IFR and the payment 
agreement that replaced it at 13 servicers were required by the 
Federal banking regulatory agencies under enforcement actions 
against the largest mortgage servicers and cover borrowers who 
were in foreclosure at some time during 2009 and 2010 at those 
servicers. The NMS, announced and filed in Federal district 
court in early 2012, requires five large mortgage servicers, 
all of which are subject to the banking agency enforcement 
actions, to address mortgage loan servicing and foreclosure 
abuses alleged by multiple Federal and State government 
agencies, by, among other things, making payments to borrowers 
and also providing specific types of foreclosure prevention and 
mitigation actions. Borrowers are not disqualified from the IFR 
or from receiving a payment or assistance under the payment 
agreement between the servicers and the Federal Reserve and OCC 
if they also receive payments or other relief as a result of 
the NMS, and payments under the IFR or the payment agreement 
will not be offset by payments the borrower has received under 
the Borrower Payment Fund of the NMS. Moreover, for servicers 
not currently part of the NMS, the foreclosure prevention 
actions required by the Federal Reserve and OCC are in addition 
to any consumer relief obligations required of those servicers 
under any settlement similar to the NMS that may be entered 
into by these servicers with the DOJ or Department of Housing 
and Urban Development.
    The agencies' enforcement actions and NMS together cover 
borrowers who were in foreclosure during an extremely active 
period of the home mortgage crisis. While borrowers are 
continuing to face foreclosure after that period, corrective 
action to servicing and foreclosure procedures taken by major 
mortgage servicers under the regulators' enforcement actions 
and the national servicing standards implemented under the NMS 
should help to prevent injuries in the future caused by 
servicer errors to borrowers who subsequently enter the 
foreclosure process. Borrowers who are not covered by these 
formal government agreements, like those who are covered, are 
able to file complaints about the handling of their foreclosure 
under the consumer assistance procedures of the Federal Reserve 
and OCC and the customer complaint procedures of the servicer 
involved.

Q.9. In their April 2013 report, the Government Accountability 
Office states that the uniqueness of each servicer's population 
and their processes for keeping borrowers' information posed 
challenges. In fact, the OCC and Federal Reserve Board said it 
was not feasible to design one file review process that would 
apply to all servicers in the IFR, and the consultants would be 
required to tailor their review processes. How do you believe 
the leeway given the consultants to tailor their own reviews, 
without proper guidance, led to the abandonment of the IFR?

A.9. Ensuring that all borrowers covered by the IFR who 
suffered similar kinds of injury received the same treatment 
was a major objective of the Federal Reserve and OCC in 
overseeing the file review process. The Federal Reserve and OCC 
undertook numerous actions aimed at achieving this goal. Not 
only were the enforcement action provisions that addressed the 
IFR requirement substantially identical for all covered 
servicers, but the Federal Reserve and OCC also issued 
extensive common guidance, including a joint framework for 
remediation of specific borrower injuries designed to promote 
consistent treatment of borrowers. In addition, Federal Reserve 
staff engaged in continuous offsite monitoring of the 
consultants, consisting of weekly calls and periodic in-person 
meetings. Federal Reserve examiners also engaged in regular 
onsite testing to review the consultants' work and each of the 
examiner teams engaged in regular calls, quarterly in person 
meetings, and other ad hoc communications as needed to ensure a 
consistent approach.
    Ultimately, the very large number of borrowers involved and 
the time-consuming, expensive, and difficult nature of the 
review substantially delayed payments to borrowers. Therefore, 
as explained in the answer to question #2 above, the regulators 
accepted the payment agreement with the 13 mortgage servicers 
to provide payments to more borrowers in a shorter time than 
would have occurred if the IFR had continued at those 
servicers.

Q.10. From May 2011 to October 2012, the OCC and FRB issued 29 
joint pieces of guidance to the consultants, and regulators had 
regular weekly meetings with the consultants to clarify 
guidance. When you continually clarified guidance to the 
consultants, what impact did that have on the loan files that 
had already been reviewed, prior to the new guidance? When 
changes were made to how files should be reviewed, is it 
logical to assume that those changes must be retroactively 
applied to the already reviewed files? Were these previously 
reviewed files reviewed again?

A.10. Given the unique and unprecedented nature of the IFR, it 
was not possible to contemplate, develop, and implement all of 
the guidance needed to conduct the IFR at the outset of the 
IFR, and many issues requiring guidance from the regulators 
surfaced only through the actual conduct of the reviews by the 
consultants. The Federal Reserve and OCC coordinated closely to 
ensure that the guidance we provided was consistent, including 
in how borrowers were treated across servicers.
                                ------                                

RESPONSE TO WRITTEN QUESTIONS OF CHAIRMAN BROWN FROM KONRAD ALT

Q.1. In your testimony you said that ``in performing an 
independent review, we are working for the regulator.'' Yet, in 
his testimony, Richard Ashton stated that ``consultants 
retained under Federal Reserve enforcement actions work for the 
organization that retained them.'' In light of these 
potentially conflicting statements, can you explain your 
relationship with financial institutions and regulators in 
average engagements beyond the Independent Foreclosure Review 
more fully?

A.1. Did not respond by publication deadline.

Q.2. While the OCC and the Federal Reserve sought to increase 
transparency in the use of independent consultants in the case 
of the Independent Foreclosure Review by publishing engagement 
letters between servicers and their consultants, in many cases 
redactions removed information that could shed light on the 
consultants' independence and the quality of reviews. For 
instance, in your engagement letter with Bank of America, your 
more than two and a half page conflicts of interest policy 
(Attachment C) is fully redacted, and the policy does not 
appear to be readily available on your Web site. Do you feel 
that your conflicts of interest policy should be removed, or 
would you support its disclosure in public enforcement actions?

A.2. Did not respond by publication deadline.

Q.3. In your testimony you stated that you were ``working for 
the regulator.'' Do you think that it would add additional 
transparency and simplify your working relationships if you 
were to enter into contracts directly with regulators, rather 
than with financial institutions?

A.3. Did not respond by publication deadline.

Q.4. Please explain your use of subcontractors and your service 
as a subcontractor for others. In what cases did you use 
subcontractors, and in what cases did you serve as a 
subcontractor for others?
    At the time of your engagement you testified that you had 
qualified people who could do this work, how many people did 
you have on staff that had specific skills in understanding how 
to conduct an internal foreclosure project?
    Can you confirm reports that work was offshored to 
employees in foreign countries, such as the Philippines? If so, 
which countries?

A.4. Did not respond by publication deadline.

Q.5. Given the results of the Magner/Jones decision, were you 
aware of the implications of the Magner/Jones decision, how did 
you account for the systemic errors at Wells Fargo, in your IFR 
review of Wells? Did you check for systemic errors at your 
other engagements BofA & PNC?

A.5. Did not respond by publication deadline.

Q.6. You frequently claimed that borrower harm calculations 
could be determined by evaluating 25 documents associated with 
a case file, experts propose that to accurately determine harm 
borrowers harm, 150-180 documents associated with a case file 
must be reviewed, please demonstrate your process compared to 
the following templates.

A.6. Did not respond by publication deadline.
                                ------                                

         RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED 
                        FROM KONRAD ALT

Q.1. For the purposes of our oversight role, please tell us 
what you believe to be the biggest design error(s) made by the 
OCC and Federal Reserve with respect to the IFR? What should be 
the lesson(s) learned?

A.1. Did not respond by publication deadline.

Q.2. As we contemplate a reauthorization of the Bank Secrecy 
Act and anti-money laundering laws, what changes do you believe 
need to be made in the law that will help make these laws less 
subject to violation?

A.2. Did not respond by publication deadline.
                                ------                                

 RESPONSE TO WRITTEN QUESTIONS OF CHAIRMAN BROWN FROM JAMES F. 
                            FLANAGAN

Q.1.1. In your testimony you noted that you ``worked closely 
with the OCC and the Fed throughout the IFR engagements'' and 
that you ``provided the regulators with weekly written and oral 
status updates.''
    Was the level of interaction between regulators and 
consultants typical for an engagement of this nature?

A.1.1. As I discussed in my testimony before the Subcommittee, 
the role of an independent consultant in an engagement pursuant 
to a consent order is highly dependent on the individual agency 
order. In our experience, we have not seen a one-size-fits all 
consent order or a typical independent consultant role. The 
scope and scale of the IFR engagements were unprecedented; in 
that context, it was important to communicate regularly with 
the regulators throughout the process and concerning all 
aspects of our work.

Q.1.2. What types of daily interactions do 
PricewaterhouseCoopers employees have with regulators and the 
financial institutions under examination? How do these 
interactions influence your independence as a consultant?

A.1.2. PwC worked closely with the regulators in a number of 
different ways during the IFR engagements. PwC engagement teams 
interacted most often with the Examiners-in-Charge (``EICs'') 
for each of the engagements, including through weekly updates 
to the EICs about the status of the engagements and emerging 
developments. The EICs, in turn, provided updated guidance, 
conducted onsite visits, and assessed and provided comments on 
the review process. PwC also provided weekly written and oral 
status updates to the OCC and the Fed and met with more senior 
representatives of both agencies to discuss broader issues 
concerning the IFR process.
    The servicers were responsible for building the files that 
were to be reviewed by the Independent Consultants during the 
IFR engagements. Accordingly, PwC regularly communicated with 
the servicers regarding the state of the loan files and made 
requests of the servicers for additional documents that were 
missing from files. In addition, PwC also communicated 
routinely with the servicers regarding the status and progress 
of the engagements. At no time, however, were there 
communications in which the servicers attempted to influence 
the way in which PwC performed its procedures or the 
observations made by PwC as a result of those procedures.
    Neither our interactions with the regulators nor our 
communications with the servicers affected PwC's independence 
or objectivity. During the IFR engagements, we were asked to 
act--and in fact acted--as impartial and objective consultants. 
Applying rules and guidance provided by the regulators and the 
Independent Legal Counsel, we provided observations regarding 
whether servicer files complied with applicable State and 
Federal laws. Neither the regulators nor the servicers sought 
to bias our review or to influence our observations. The 
regulators provided the framework with which we worked, and, as 
described above, we periodically discussed with the servicers 
the state of the loan file documentation and the status of our 
work. We see no way that either type of conversation could have 
impaired our objectivity in performing the IFR work.
    Moreover, as I emphasized during my testimony before the 
Subcommittee, we view our objectivity and impartiality as the 
foundation of our brand and the premise that underlies all of 
our professional services. Our firm maintains extensive 
procedures, policies, processes, and controls in an effort to 
govern which engagements we can pursue and accept and to 
maintain our objectivity and impartiality during the course of 
engagements. We also adopted a number of specific procedures to 
maintain our objectivity and impartiality in the IFR 
engagements, which I outlined in my testimony.

Q.2. Do you think contracting directly with the regulatory 
agencies, instead of with the financial institutions, would 
enable you to perform the task at hand and avoid the potential 
for conflict of interests?

A.2. Regardless of whether we are engaged directly by the 
regulatory agency or by the financial institution, we believe 
that we can perform the services objectively, free of conflicts 
of interest, and consistent with professional standards. For 
example, as discussed above, we believe we performed the IFR 
engagements impartially and objectively and without any 
conflicts of interest. We maintain procedures, processes, 
policies, and controls that govern which engagements we can 
accept, and when we feel that we cannot meet the necessary 
standards of objectivity and impartiality, we decline the 
engagement. With regard to the IFR engagements specifically, 
the regulators' review and approval of the engagement letters 
should obviate any concern that the terms of engagement would 
have been any different had the engagement been by the 
regulators, instead of by the servicers. We believed at the 
outset and continue to believe today that we were able to and 
in fact did perform the IFR engagements without any bias and 
free of any inappropriate influence.

Q.3. Was your organization able to learn any valuable 
information about the mortgage servicing business as a result 
of your work on the IFR? Can you offer any observations about 
the flaws or shortcomings in the current mortgage servicing 
model, or recommendations for improvements?

A.3. As reflected in our engagement letters and the guidance 
provided by the regulators, the scope of PwC's IFR services was 
narrow: we were to apply procedures designed to identify 
servicer errors and which of those errors caused financial harm 
to a borrower. We were not engaged to, and did not endeavor to, 
assess broader questions concerning the mortgage servicing 
business. The regulators, who received not only our reports but 
those of the other Independent Consultants, are better suited 
to address the state of the mortgage servicing business and any 
need for change.
                                ------                                

  RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED FROM JAMES F. 
                            FLANAGAN

Q.1. For the purposes of our oversight role, please tell us 
what you believe to be the biggest design error(s) made by the 
OCC and Federal Reserve with respect to the IFR? What should be 
the lesson(s) learned?

A.1. The IFR process served two purposes--to provide the 
regulators with sufficient data to make policy judgments about 
reforms to the servicing business and to compensate borrowers 
for injuries arising from servicer error. While those two 
missions, which are embedded in the January 2011 settlements 
between the regulators and the servicers, are complementary, 
the effort to identify all servicer errors, irrespective of 
whether they could have or did cause financial injury, delayed 
our efforts to provide observations regarding financially 
harmed borrowers. It is not apparent that the twin missions of 
the IFR process represent a design flaw, but they were the 
source of much of the public disappointment in the time it took 
to conduct the reviews. It appears with the benefit of 
hindsight that there was perhaps too little consideration given 
when the IFR process was conceived to the tension between the 
effort's competing goals.

Q.2. As we contemplate a reauthorization of the Bank Secrecy 
Act and anti-money laundering laws, what changes do you believe 
need to be made in the law that will help make these laws less 
subject to violation?

A.2. Issues involving the Bank Secrecy Act and anti-money 
laundering laws were not within the scope of the IFR 
engagements, and I am therefore not in a position to address 
this question.
                                ------                                

 RESPONSE TO WRITTEN QUESTIONS OF CHAIRMAN BROWN FROM OWEN RYAN

Q.1.1. In your testimony you noted the importance of ``open 
communication and an appropriate working relationship among the 
independent consultants, the regulators and the institutions 
being monitored.''
    Was the level of interaction between regulators and 
consultants typical for an engagement of this nature?

A.1.1. There was frequent, open, and continuous communication 
between Deloitte & Touche LLP (``Deloitte'') and the regulators 
throughout the Independent Foreclosure Review (``IFR'') 
engagement. There were weekly scheduled meetings and timely 
reporting to the regulators which served as an important 
mechanism for communicating our approach and progress. Since 
the IFR engagement was unique in our experience, it is 
difficult to assess whether this level of interaction was 
``typical'' for an engagement of this nature.

Q.1.2. What types of interactions do Deloitte employees have 
with regulators and the employees of the institutions they are 
examining?

A.1.2. The types of interactions that Deloitte personnel have 
with regulators on independent consulting engagements generally 
include meetings, written communications and reporting on a 
timely basis. When we are engaged in the capacity of an 
independent consultant, Deloitte personnel are typically 
working subject to the monitoring, oversight, and direction of 
the regulators. With respect to employees of the institution we 
are reviewing, Deloitte personnel meet with employees of the 
financial institution for various purposes such as gathering 
information, status updates, or to discuss the ramifications of 
particular regulator requests.

Q.1.3. How do these interactions influence your independence as 
a consultant?

A.1.3. Our independence as a consultant was not influenced in 
any way by the financial institution. In the IFR engagement, 
and as required in our engagement letter, Deloitte was subject 
to the monitoring, oversight, and direction of the regulators, 
and we were required to be objective at all times. Deloitte was 
expressly not subject to the direction, control, supervision, 
oversight, or influence by the financial institution. In 
addition, we have policies and procedures that are designed to 
ensure that each engagement is approached with due professional 
care, objectivity, and integrity, consistent with the American 
Institute of Certified Public Accountants consulting standards.

Q.2. In your testimony you stated that engagements require 
``regulatory approval of the independent consultant and the 
scope and methodology to be used.'' How would contracting 
directly with regulators, rather than with financial 
institutions, change the nature of the engagement?

A.2. Direct contracts between the independent consultants and 
the regulators may have an impact on the procedure for the 
selection and retention of independent consultants, in that the 
selection and retention may be subject to Federal procurement 
rules and requirements, including, for example, competitive 
bidding. Such a process may lengthen the time to retain an 
independent consultant and may complicate how the independent 
consultant is compensated. Such direct contracts might enhance 
the appearance of objectivity, although we strongly believe 
that we are able to and do discharge our responsibilities with 
appropriate objectivity regardless of the contractual 
arrangement. Direct contracts between independent consultants 
and the regulators would not necessarily be expected to affect 
the level and quality of the already robust communications 
between the consultants and the regulators, or the actual scope 
of the independent consultant's services.
                                ------                                

         RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED
                         FROM OWEN RYAN

Q.1. For the purposes of our oversight role, please tell us 
what you believe to be the biggest design error(s) made by the 
OCC and Federal Reserve with respect to the IFR? What should be 
the lesson(s) learned?

A.1. In response to this question, we refer to the GAO's March 
2013 Report (the ``Report'') that made detailed findings and 
conclusions and stated that it revealed ``three key lessons'' 
that could help inform regulators' implementation of the 
amended consent orders: (1) designing project features during 
the initial stages of the process to influence the efficiency 
of file reviews, (2) monitoring progress to better ensure the 
goal of achieving intended results, and (3) promoting 
transparency to enhance public confidence. We agree with these 
lessons and the recommendations of the Report.

Q.2. As we contemplate a reauthorization of the Bank Secrecy 
Act and anti-money laundering laws, what changes do you believe 
need to be made in the law that will help make these laws less 
subject to violation?

A.2. We have not formed a view as to what, if any, changes may 
need to be made to these laws. We are, however, open to 
consideration of any such changes to the law and welcome the 
opportunity to engage in dialogue with legislators and 
regulators in connection with any proposed legislation, and 
would be happy to provide any assistance that was needed as 
part of this process.
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