Congresswoman Maxine Waters, Ranking Member of the House Financial Services Committee, announced today that she has introduced legislation to reform the use of independent consultants in banking regulation and enforcement processes. She is joined by Representatives Elijah E. Cummings, Al Green and John Conyers, Jr. as original cosponsors.
The Stop Outsourcing Banking Enforcement and Examination Act would impose significant transparency measures on banking enforcement by requiring that consent orders between federal banking regulators and companies subject to their oversight be made public whenever the use of outside consultants in involved.
The legislation is primarily intended to address conflicts of interest in the use of independent consultants which are paid by the institutions whose work they have been hired to investigate. For example, in the Independent Foreclosure Review, the Federal Reserve and the Office of the Comptroller of the Currency instructed mortgage servicers to hire outside consultants to determine the degree of harm those companies had done to borrowers who had been foreclosed upon improperly.
The bill mandates strict conflict of interest rules by requiring the disclosure of any business relationship between consultants, banking regulators, and financial institutions. It would also bar independent consultants from reviewing their own work, or from participating in a consent order when their work will be concurrently reviewed by other consultants.
“There are clear conflicts of interest in the use of private consultants which are paid by the companies they oversee,” said Congresswoman Waters. “This is not “independence” – it is work for hire. It is not an academic issue. In the case of the Independent Foreclosure Review, when “independent” consultants fail to accurately assess error rates for improper foreclosures, it means that regulators may vastly underestimate the damage done to aggrieved borrowers. This conflict of interest favors the companies which pay outside consultants over the consumers who have been wronged. The situation clearly requires a legislative remedy.”
Other enhanced oversight provisions mandated by the legislation include:
- Requiring that consultants be paid directly by the government, rather than the company or companies subject to the consent order.
- Requiring that the regulators provide detailed cost estimates and methodologies for fulfilling consent orders.
- Creating a private right of action whereby a person or class of persons harmed by an independent consultant’s failure to carry out consent order can bring a civil action against the consultant.
- Allowing regulators to claw back fees paid to independent consultants in the event that they fail to carry out a consent order.
Ranking Member Waters has repeatedly and outspokenly criticized the Independent Foreclosure Review (IFR) process, which she has closely monitored since its inception in early 2011.
Legislative text of the Stop Outsourcing Banking Enforcement and Examination Act -- 4/11/2013
Letter by Congresswoman Waters and Colleagues to the GAO requesting a report on the Independent Foreclosure Review – 1/13/12
Waters’ statement on the settlement which effectively ended the IFR – 1/7/13
Waters’ letter to the Federal Reserve and the OCC raising questions about the settlement with mortgage servicers – 1/31/13
Press release -- Waters requests hearing on the IFR process – 2/5/13
Waters’ letter to the Federal Reserve and OCC requesting additional information about the Independent Foreclosure Review – 2/15/13
Waters Responds to GAO Report – Calls the Independent Foreclosure Review Process “Flawed” – 2/4/13