The New York Department of Financial Services (NYDFS) says, in the investigative report on Promontory Financial Group that led to its recent sanctions against the bank consulting firm for work at Standard Chartered, that the agency “was created in 2011 to help ensure the safety and soundness of New York’s banking, insurance and financial services industries, to help ensure prudent conduct by providers of financial products and services, and to promote the reduction and elimination of unethical conduct by and with respect to banking, insurance and other financial services institutions.”
The New York State Banking Department and the New York State Insurance Department were abolished in 2011 and the functions and authority of both former agencies were transferred to the New York State Department of Financial Services as of October 3, 2011.
That was too late, unfortunately, for the NYDFS to have any influence on limiting or eliminating the independence conflicts that existed when the same three firms NYDFS has sanctioned for losing their independence and objectivity while working on behalf of the regulator at Standard Chartered and Bank of Tokyo-Mitsubishi then went to work on behalf of the OCC and the Fed during the 2011-2013 mortgage foreclosure reviews.
What prompted the foreclosure reviews?
In April of 2011 the Interagency Review of Foreclosure Policies and Practices published a report that documented the pattern of potential illegal and fraudulent behavior that has now been proven in many, many court cases since. Eventually there was additional overwhelming evidence from public and private court cases that banks proceeded fraudulently and illegally in many foreclosures and looted borrowers and institutional investors in mortgage securities by charging fraudulent and illegal fees in the process. One particularly horrible case was finally settled in the borrower’s favor in 2012.
In a scathing opinion issued last week, Elizabeth Magner, a federal bankruptcy judge in the Eastern District of Louisiana, characterized as “highly reprehensible” Wells Fargo’s behavior over more than five years of litigation with a single homeowner and ordered the bank to pay the New Orleans man a whopping $3.1 million in punitive damages, one of the biggest fines ever for mortgage servicing misconduct.
“Wells Fargo has taken advantage of borrowers who rely on it to accurately apply payments and calculate the amounts owed,” Magner writes. “But perhaps more disturbing is Wells Fargo’s refusal to voluntarily correct its errors. It prefers to rely on the ignorance of borrowers or their inability to fund a challenge to its demands, rather than voluntarily relinquish gains obtained through improper accounting methods.”
Promontory acted as the “independent” consultant for Wells Fargo for its foreclosure review but the firm never had to formally quantify and document the harm the bank caused borrowers because the foreclosure reviews were stopped on January 7 , 2013, replaced by an arbitrary settlement. No reports from the consultants were ever issued for public or Congressional review.
When did the foreclosure reviews start?
In April of 2011 the OCC and Fed signed consent orders against fourteen mortgage servicers, including those owned by almost all the major U.S. banks, that allowed those banks to pick one or more professional-services firms to review their foreclosure actions for abuses and report the findings to the regulators.
I wrote at the time in American Banker that allowing the banks to choose their own judge, jury, and jailer presents almost untenable conflicts of interest. All of the consulting firms that were initially considered to do the work served the banks as consultants already. The banks, and their mortgage servicing operations, are existing or prospective clients.
PricewaterhouseCoopers, for example, audits Bank of America and JP Morgan Chase, two of the fourteen servicers under scrutiny. PwC’s retired Chairman, Sam DiPiazza, is an executive of, and on the board of, Citigroup, another bank with a servicer to be reviewed. Promontory Financial Group and Treliant Risk Advisors are professional services firms that serve the mortgage servicers directly on other consulting assignments.
Julie Williams, First Senior Deputy Comptroller and Chief Counsel of the OCC told Congress in July that, “these firms are required to operate independently and avoid interests or priorities that conflict with areas addressed in the Orders [and] to specify in their engagement letters with the servicer that their foreclosure review work will be subject to the direction of the OCC and not the direction, control, or influence of the servicer.”
On January 7, 2013 the Fed and OCC jointly announced an “agreement in principle” to end the foreclosure reviews at ten of the fourteen mortgage servicing companies. I wrote in Forbes at the time that this “provided a neat recovery for the banks, and their “independent” consultants, who’ve been mired in an expensive, seemingly unending project from hell. The “independent” consultants assisted the banks in “extending and pretending” long enough to figure a way out. Now no one will ever have to admit how much the banks really owed borrowers and institutional investors for financial damage from foreclosure abuses.”
By ending the reviews the Fed and OCC also dodged the persistent criticism of their poor design and weak monitoring of the consent decrees that started it all. (An expanded discussion of the settlement is here.)
Ten mortgage servicers agreed to pay more than $8.5 billion in cash and other assistance to help borrowers now rather than pay billions later based on the results of the foreclosure review process. The April 2011 OCC/Fed consent orders sanctioned the servicers for foreclosure abuses for the period 2009-2010 and mandated the detailed reviews. Not one check was ever cut for the harmed borrowers, but the banks have reportedly paid out more than $1.5 billion dollars to the “independent” consultants hired and paid by the banks, rather than directly by the regulators, to perform the detailed reviews.
Although the NYDFS enforcement actions agaisnt the banks and Promontory, Deloitte and PwC have happened fairly recently, the consulting work that Promontory Financial Group, Deloitte and PwC did on behalf of the agencies that became NYDFS at Standard Chartered Bank and Bank of Tokyo-Mitsubishi was performed long before their major roles as mortgage foreclosure reviewers.
Pursuant to this mandate, on September 4, 2013, the Department undertook an investigation into Promontory Financial Group, LLC (“Promontory”). The conduct in question relates to reports that Promontory prepared and submitted to the Department in 2010-2011 detailing the findings of its review of certain transactions by Standard Chartered Bank (“Standard Chartered” or the “Bank”), an institution regulated by the Department.
This Agreement…made and entered by and between Deloitte Financial Advisory Services LLP, a Delaware limited liability partnership, and the New York State Department of Financial Services to resolve the Department’s investigation of Deloitte’s actions in performing certain consulting services for the New York Branch of Standard Chartered Bank in 2004 and 2005…
From the NYDFS settlement agreement with PwC over its work at Bank of Tokyo-Mitsubishi:
This Agreement…made and entered by and between PricewaterhouseCoopers LLP, a Delaware limited liability partnership, and the New York State Department of Financial Services to resolve the Department’s investigation of PwC’s actions in performing certain consulting services for the Tokyo Branch of the Bank of Tokyo – Mitsubishi Ltd. in 2007 and 2008…
When the foreclosure review consulting revenues are referenced in the media, reporters use the numbers given by the consultants during testimony before the Senate Banking Committee back in April.
Ben Protess and Jessica Silver-Greenberg in The New York Times DealBook, June 20, 2013:
The pressure from Capitol Hill comes as fresh details emerge about one of the consulting industry’s most lucrative assignments. When several consulting firms were enlisted to pore over home foreclosures as part of a federal enforcement action, they collectively received about $2 billion for their work, even though the consultants reviewed only a fraction of the loans.
New documents suggest that the Promontory Financial Group, which examined loans for Wells Fargo, Bank of America and PNC, was the highest paid of the consultants. The firm, run by a former comptroller of the currency, Eugene Ludwig, received $927 million for reviewing more than 250,000 loan files, according to documents provided to the Senate Banking Committee and reviewed by The Times.
PricewaterhouseCoopers, which reviewed files for four banks, was paid about $425 million. Deloitte, which handled JPMorgan’s foreclosure review, was paid $465 million.
The problems with these reported revenue numbers are numerous.
How can Promontory, responsible for three foreclosure reviews, have billed twice what PwC billed for four reviews, more than any other consultant selected? (The consultants’ engagement letters posted by the OCC and Fed had “blob after blob of blackouts”, redactions where the billing rates should be. Did different banks get charged different rates for same services by consultants? Did Promontory charge more for senior partners to act as “coordinator” of conference calls between the “independent” consultants that did not include the regulators?)
How can Deloitte, responsible for the JP Morgan Chase foreclosure review, which was reportedly the cleanest of all the reviews with the lowest reported error rate, have charged more for that one engagement than PwC did for working on Citigroup, US Bank, SunTrust, and Ally/ResCap?
How can the overall bill for the foreclosure reviews be only $2 billion, the total reported to Senator Sherrod Brown as part of the Senate Banking Committee ongoing investigation into the consultants role? That total seems to be based on adding together only three consultants bills, when seven consultants covered a total of fourteen engagements. (Ernst & Young hasn’t reported any numbers and, yet, the firm performed two reviews independently – at problematic HSBC and MetLife – and was the primary, and probably very expensive, subcontractor to Promontory for the Bank of America. Navigant inherited the Aurora Bank engagement after Allonhill was disqualified and also performed the review of OneWest directly. Treliant Advisors was responsible for Sovereign Bank and Clayton Services is still working at EverBank.)
Finally, how can PwC testify to Congress that the firm only billed “about $425 million”, as if that were a final number, when the tab for Ally/ResCap alone, according to what ResCap told a judge in March, will be at least $300 million? (The ResCap foreclosure review is ongoing since, given the bankruptcy, ResCap did not sign up for the negotiated settlement announced in January.)
A few weeks after the foreclosure reviews were halted in January 2013, the OCC’s Julie Williams, who told Congress that, “these firms are required to operate independently and avoid interests or priorities that conflict…” joined Promontory.
The move will reunite Williams, who worked at the OCC for 19 years, with Eugene Ludwig, the comptroller of the currency from 1993 to 1998 and the founder of Promontory.
Williams will serve as a managing director of the firm and director of Promontory’s domestic advisory practice.
Williams was effectively forced out of the OCC last summer by current Comptroller Thomas Curry, in part because of pressure from the Obama administration. Consumer groups and the administration have long criticized Williams for her role in helping craft the OCC’s 2004 preemption regulations, which they say contributed to the financial crisis.
The foreclosure review conflicts
Of the numerous independence conflicts at the foreclosure reviews only one was addressed, related to a small consulting firm called Allonhill. I wrote about them all in June of 2013 at Forbes:
One of the fundamental tenets of the “independent” foreclosure reviews of mortgage servicers ordered by the OCC and Federal Reserve Board was the independence and objectivity of the consultants. The ICs for the IFRs were supposed to determine how much harm had been inflicted on borrowers subjected to error-ridden and, in some cases, fraudulent foreclosures.
We know that Allonhill was disqualified after the reviews started. We also know that the OCC looked the other way at the blatant independence conflict when JP Morgan engaged Deloitte to review Deloitte’s former audit clients’ foreclosure failures at Bear Stearns and Washington Mutual – now owned by JPM. There was at least one more serious consultant independence issue than previously reported.
PricewaterhouseCoopers, selected to perform the “independent” foreclosure reviews for Ally/ResCap, approved by the Fed, was the ResCap independent auditor during a portion of the period covered by ResCap’s foreclosure reviews.
If Promontory, PwC and Deloitte had any inklings of the NYDFS criticisms that would start in late 2011 and early 2012, they didn’t generate any hesitation to accept the assignment in April of 2011 from the OCC and Fed to perform almost all of the largest and most contentious foreclosure reviews.
The conflict for Deloitte in its assignment to perform the foreclosure review at JP Morgan Chase was the most egregious, in my opinion and, although it was raised in Congress, it was never addressed by the OCC.
Here I describe it in American Banker all the way back in March of 2012:
The Deloitte partner in charge of the JPMorgan engagement, Ann Kenyon, was a partner on Deloitte’s audit of Washington Mutual. So it would not be in her interest for Deloitte’s consultants to turn up any auditing errors the firm made with that mortgage originator, particularly since Deloitte is a defendant in shareholder litigation related to Washington Mutual‘s collapse. In addition, Deloitte audited Bear Stearns, and is going to trial as a defendant in Bear Stearns investor litigation related, in large part, to EMC. So the consultants wouldn’t have a strong incentive to find any auditing goofs there, either.
Richard Inserro joined PricewaterhouseCoopers (PwC) in 2000 and spent eight years in the on-deck circle as a Director, according to his lengthy LinkedIn profile. Inserro was finally elected to the partnership effective July of 2013. That’s a process that takes more than a year and that some go through more than once before making it. Sources close to the investigation confirmed that NYDFS sent PwC a subpoena before a settlement with PwC’s client Bank of Tokyo-Mitsubishi UFJ (BTMU) was announced on June 20, 2013. PwC promoted Inserro in spite of knowing an investigation by NYDFS into its twelve-month long “historical transaction review”, or HTR consulting engagement at BTMU that began in June 2007 was already underway.
Details of a NYDFS settlement with PwC related to its work at BTMU, announced Monday, describe an unnamed PwC Director who “elevated his apparent concern for client satisfaction over the need for objective inquiry.” A person close to the PwC investigation identified Inserro as the PwC Director referred to by NYDFS. PwC will pay a $25 million fine and endure a two-year ban for improperly altering the BTMU HTR report submitted to NYDFS. That fine is two-and-a-half times as large as the one Deloitte paid NYDFS for similar charges for its work at Standard Chartered Bank a year ago and PwC’s ban is twice as long.
Inserro knew what he was doing. The NYDFS PwC investigation discovered several emails that Benjamin Lawsky, the Superintendent of Financial Services for New York, characterized Monday as examples of a consultant going along with a “whitewash”. In one instance Inserro warned that a PwC memorandum describing how the bank stripped incriminating language from a wire message was “probably correct, but the bank or [its attorneys] may get all twisted up about this affirmative statement.”
Client interest. Serve the client interest by seeking to accomplish the objectives establishedby the understanding with the client while maintaining integrity and objectivity. fn 2fn 2In “Integrity” (ET sec. 0.300.040), integrity is described as follows: “Integrity requires a member to be, among other things, honest and candid within the constraints of client confidentiality. Service and the public trust shouldnot be subordinated to personal gain and advantage. Integrity can accommodate the inadvertent error and the honest difference of opinion; it cannot accommodate deceit or subordination of principle.“In “Objectivity and Independence” (ET sec. 0.300.050), objectivity and independence are differentiated asfollows: “Objectivity is a state of mind, a quality that lends value to a member’s services. It is a distinguishing feature of the profession. The principle of objectivity imposes the obligation to be impartial, intellectually honest, and free of conflicts of interest. Independence precludes relationships that may appear to impair a member’s objectivity in rendering attestation services.