The NYDFS Case Against Promontory and the Bigger Problem of Big Four Bank Consulting

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.

Here’s the Huffington Post:

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.

The NYDFS case against Promontory has been brewing for a while. From the NYDFS investigative report on Promontory’s work at Standard Chartered:

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.

Revolving door

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.

American Banker reports:

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: