COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER PROTECTION met in OPEN SESSION to conduct a hearing entitled “Outsourcing Accountability? Examining the Role of Independent Consultants”. The witnesses on Panel II were: Mr. Konrad Alt, Managing Director, Promontory Financial Group, LLC; and Mr. James F. Flanagan, Leader, U.S. Financial Services Practice, Pricewaterhouse Coopers LLP. Subcommittee Member Senator Elizabeth Warren (D-MA) Questions Panelists.
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Financial Institutions and Consumer Protection April 11, 2013
11 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 two 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?
8 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.
12 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?
15 Mr. Alt. No, Senator, we had not.
16 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 one percent of the cases or occurred in 90 percent of the cases?
23 Mr. Alt. Senator, we were not in a position to conclude that based on the results at the time of the settlement.
1 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?
25 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.
6 Senator Warren. That is all right. So what was your rate of double-coding?
8 Mr. Alt. I do not know that I could give you an overall rate. We could perhaps obtain that. It—
10 Senator Warren. So, let me ask it a different way. What was your error rate?
12 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.
16 Senator Warren. Can you give me an idea of what your error rate was?
18 Mr. Alt. Uh–
19 Senator Warren. What was the range?
20 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.
23 Senator Warren. All right. And was the error rate coming down over time?
25 Mr. Alt. I believe it was, yes.
1 Senator Warren. All right. So I would like to know about the error rate.
3 Mr. Flanagan, the same question for you.
4 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.
9 Senator Warren. You cannot tell me whether you had an error rate of one percent or 90 percent?
11 Mr. Flanagan. That is my understanding, is that at this point, we are not able to do that.
13 Senator Warren. Mr. Ryan?
14 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.
18 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.
23 Senator Brown. Thank you, Senator Warren. We will do a second round.
5 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?
13 Mr. Ryan. Yes.
14 Senator Warren. And this was put out–who put this out? Mr. Flanagan?
16 Mr. Flanagan. [Shaking head.]
17 Senator Warren. I think this was put out by the OCC and the Federal Reserve, is that right–
19 Mr. Ryan. Yes.
20 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 service members 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?
11 Mr. Ryan. No, Senator, we did not.
12 Senator Warren. So who put them in?
13 Mr. Ryan. Well, I am not sure how that schedule was prepared. I saw it for the first time yesterday.
15 Senator Warren. Mr. Flanagan?
16 Mr. Flanagan. Same response. We were not involved in the accumulation of that information.
18 Senator Warren. Mr. Alt?
19 Mr. Alt. Senator, I have seen this schedule, but I am not familiar with the basis for its preparation.
21 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?
2 Mr. Alt. No, Senator, we were not asked to do that.
3 Senator Warren. Mr. Flanagan?
4 Mr. Flanagan. No, we were not.
5 Senator Warren. Mr. Ryan?
6 Mr. Ryan. We were not, Senator.
7 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?
12 Mr. Alt. Senator, as I said, I am not familiar with the basis for the schedule—
14 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?
21 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.
24 Senator Warren. All right. But you made no independent review of this, were not asked to make any independent review of this.
2 Mr. Ryan. We did not.
3 Senator Warren. Mr. Flanagan?
4 Mr. Flanagan. PWC was not involved in the settlement or the preparation of that schedule.
6 Senator Warren. All right. Mr. Alt?
7 Mr. Alt. Same answer, Senator. We were not involved.
8 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.
13 Mr. Chairman, I do not have any other questions.
14 Senator Brown. Thank you, Senator Warren.