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Is The OCC's Independent Foreclosure Review A Farce?


Late last year, the Office of the Comptroller of Currency announced that several banks had agreed to conduct an independent foreclosure review to determine whether they had improperly conducted foreclosures that led to harm. Adam Levitin of Credit Slips had predicted that the reviews would be perfunctory and pointed to what appeared to be job listings for foreclosure file reviewers.

In December 2011, Prof. Levitin posted at length about other issues surrounding the OCC foreclosure reviews, including some rather significant conflicts of interest between the reviewing entities and the banks under review. Quite simply, many of the companies conducting the reviews are run by individuals who used to represent the interests of the banks that are currently under review. While it would appear that this conflict of interest was waived on at least one occasion, why wouldn't the bank waive it? A friendly auditor is much better than a hostile or neutral auditor.

Last week, Martin Andelman posted information that he obtained from one of the Wells Fargo file reviewers. The email described a system wherein auditors were allowed to notarize each other's reviews, a system wherein digging for information is discouraged, and a system wherein out of 10,000 files reviewed, only 4 were sent to Wells Fargo for further comment. When returned from Wells, the comment was, "no problems in these files." Andelman's blog post dissects several other issues with the Wells Fargo -- Promontory review deal.

At the end of the day, it would appear that the OCC's independent foreclosure review is a complete sham, at least as far as the review of Wells Fargo's files is concerned. This is the problem with the current regulatory framework -- the regulators are generally the friends and former co-workers of those being regulated. You can see this in the "admit no wrongdoing" settlements forged between banks and federal regulators as well.

Until we admit that allowing a fox to guard a henhouse is a bad idea, we'll continue to see crony regulators doing very little to regulate and everything they can to justify the behavior of their former co-workers.