WASHINGTON, May 19 (Reuters) - U.S. regulators are pinning their hopes on independent consultants picked by large U.S. banks to uncover the true depth of foreclosure misconduct seen at lenders.
Regulators are close to signing off on these consultants, which are expected to include Promontory Financial Group, Treliant Risk Advisors and PricewaterhouseCoopers.
The consultants are supposed to pick up where bank regulators left off in their review of the largest mortgage servicers, including Bank of America, JP Morgan Chase, Wells Fargo and Citigroup.
The government review released last month found "pervasive" misconduct including sloppy paper trails and "robosigning" of foreclosure documents, but it only scratched the surface, by some regulators' account.
Now the government is relying upon the bank-selected consultants, who must be approved by the regulators, in a high-stakes review that will help determine the potentially billions of dollars in fines the industry will have to pay.
It will also determine which borrowers can receive payments from banks to compensate them for servicers' mistakes.
Some lawmakers and consumers groups doubt the rigor of this approach.
Jack Reed, the Senate Banking Committee's number two Democrat, said the consultants have a natural incentive for a soft touch.
"In order to do a thorough evaluation you have to have people who don't have any vested interest in the outcome either immediately because they have a relationship with the financial institution or might have one in the future," Reed said in an interview with Reuters.
OCC PLEDGES THOROUGH REVIEW
The Office of the Comptroller of the Currency, the Federal Reserve and the Office of Thrift Supervision required the independent reviews when they settled in April with 14 mortgage servicers.
The settlement forces lenders to tighten up their operations for dealing with troubled borrowers, but it did not immediately address monetary penalties.
It also fell short of the "global" settlement originally envisioned because it did not include the U.S. Justice Department and state attorneys general, who are continuing their probe of shoddy foreclosure practices.
OCC said the independent review process has safeguards to ensure it is thorough and credible.
"The key thing is that the independent consultant needs to recognize that the client is the regulators... and not the bank," said Joe Evers, a large bank deputy comptroller at the OCC. "They need to be taking direction from us and they need to be meeting our expectations."
The regulators must approve the consultants doing the review as well as the plan they create for conducting the investigation.
Their work will also be continuously scrutinized and not simply evaluated at the end, Evers said. "There are quite a few checks and balances in the order to make sure the banks do this right," he said.
The firms charged with reviewing foreclosure actions are expected to be in place by the end of the month.
Not all regulators have full confidence in the consultants' "look back" reviews.
Sheila Bair, chairman of the Federal Deposit Insurance Corp, which is not part of the settlement, said the government does not yet know the full extent of foreclosure process problems, noting the hope is now on the consultants' reviews.
"However, we have heard concerns regarding the thoroughness and transparency of these reviews, and we continue to press for a comprehensive approach to this 'look back,'" she told the Senate Banking Committee on May 12.
One issue is who would do the review if not the consulting firms. Regulators say they don't have the manpower, and so they are looking for firms with the required expertise.
Senator Reed suggested the regulators at least hire the firms directly rather than approve the banks' choices.
Evers said regulators decided not to take this approach because it would have raised government contracting issues that could have slowed when the reviews begin. He said the agency also has had success using third party reviews in past enforcement actions.
Some housing groups said their concern is less with the idea of hiring an outside consultant as it is with how thorough the review will be.
The consultants will develop a plan for their investigation that will be approved by the regulators, but the enforcement agreement signed in April leaves much of these details to be determined.
"If you need to hire third parties, they need to have very specific guidelines and those are lacking," said Alys Cohen, a lawyer in the National Consumer Law Center's Washington office.
(Reporting by Dave Clarke)