Alert April 16, 2013

OCC Deputy Chief Counsel Testifies Before Senate Subcommittee Concerning Retention by Banks of Independent Consultants in Connection with OCC Enforcement Actions

On April 11, 2013, OCC Deputy Chief Counsel Daniel P. Stipano testified before the U.S. Senate Subcommittee on Financial Institutions and Consumer Protection (the “Subcommittee”) of the Committee on Banking, Housing and Urban Affairs concerning retention by banks of independent consultants in connection with compliance with the terms of OCC enforcement actions.  The Subcommittee conducted the hearing in the aftermath of the early termination as “failed” of independent foreclosure reviews, involving the use of independent consultants, required under OCC and FRB consent orders against banking organizations with major mortgage servicing operations (the “Independent Foreclosure Review”).

In his testimony, Mr. Stipano stated that the OCC has a longstanding practice, in appropriate cases, of using articles in enforcement agreements and orders that require banks to retain independent consultants.  He said that independent consultants are sought where they provide subject matter expertise, needed staff resources and/or objectivity that is not available at the applicable bank.  Mr. Stipano noted that absence of the needed expertise or staff resources (and the need to use independent consultants) is often found at community banks.  Mr. Stipano stated that the contexts in which the OCC often requires a bank to retain independent consultants include situations where a bank must:

  1. address deficiencies in Bank Secrecy Act/anti-money laundering compliance;
  2. review the quality of its loan portfolio;
  3. assess the accuracy and completeness of its books and records;
  4. perform its annual review of the adequacy of its allowance for credit losses; and
  5. review real estate appraisals, compensation, internal controls, and information technology systems.

Mr. Stipano stated that types of independent consultants involved in connection with banks’ compliance with OCC enforcement actions have included certified public accountants, lawyers, financial consultants, and information technology specialists, among others.  In general, Mr. Stipano said, the practice of using independent consultants has been effective and constructive.  “Through this practice,” said Mr. Stipano, “the OCC has caused banks to address effectively a variety of operating and management deficiencies, to come into compliance with laws, rules and regulations, and to operate in a safe and sound manner.

In his testimony, Mr. Stipano stressed that even though the bank selects and compensates the independent consultant, the OCC oversees the selection of, and performance by, the independent consultant.  A bank is required to submit the consultant’s qualifications to the OCC, and the OCC assesses the expertise and resources of the proposed consultant.  The OCC also considers whether the proposed independent consultant’s “existing and prior relationship with the bank and potential conflicts of interest” pose concerns that cause the OCC to object to (and thereby prevent) the use of the independent consultant in connection with the applicable enforcement action.  The OCC also often reviews a bank’s engagement agreement with the proposed consultant, oversees the consultant and its progress during the engagement.  Moreover, after the consultant presents its final report on the matter to the bank, the OCC may require that the consultant perform additional work to meet the full requirements of the enforcement action.  As part of its supervisory process, the OCC also takes steps to test and validate progress reported by the consultant and the bank.

Mr. Stipano also stressed that the use of an independent consultant does not relieve the bank or its Board of Directors of responsibility for “ensuring that all needed corrective actions are identified and implemented.

With respect to use of independent consultants by banks in the Independent Foreclosure Review, Mr. Stipano stated that the process did not work effectively and efficiently because of the “unprecedented” breadth, scale and scope of the file reviews and the large number of banks, independent consultants and legal counsel involved in the process.  In other words, Mr. Stipano suggested, the failure of the Independent Foreclosure Review process is an aberration and should not be used as a basis for rejecting the use of independent consultants by banks in connection with other OCC enforcement actions.

Mr. Stipano then noted that in the aftermath of the unsuccessful Independent Foreclosure review, the OCC is exploring ways to improve banks’ usage of independent consultants and the OCC’s supervision of banks’ usage of independent consultants “particularly for situations involving significant consumer harm or law enforcement implications.

Separately, at the Subcommittee Hearing, Senator Jack Reed (D-RI) stated that, in his view, the bank regulatory process would be improved if an independent consultant were selected and compensated by the OCC (or another regulatory agency) rather than by the applicable bank since, in Senator Reed’s opinion, an independent consultant has an economic incentive to please its bank client.

Furthermore, at the Subcommittee Hearing, Mr. Stipano said that the OCC would welcome a legislative change that would enhance the federal bank regulatory agencies’ authority to take enforcement actions directly against independent consultants.  Financial services industry and independent consultant reactions to this request have included statements that: (1) the bank regulatory agencies already have significant power over a bank’s relationship; and (2) such enhanced authority could threaten the ability of consultants to remain “independent.”