Is the OCC the Most Corrupt US Bank Regulator?

By Yevs Smith

As much as I’m fond of the name “Naked Capitalism,” I am beginning to wonder whether a more accurate description of this blog’s beat might be “Naked Corruption.” Our continuing discussion of the Office of the Comptroller of the Currency’s foreclosure whitewash reviews serves as an object lesson.

The Fed and the Treasury are pilloried much more regularly than the OCC by virtue of the fact that they are more visible. But pound for pound, the OCC is arguably more pernicious. It was the OCC that decided to decamp from the then 50 state attorney general negotiations because, apparently, they might not produce a bank-friendly-enough outcome (remember, even though these negotiations keep being depicted in the press as “state attorney general” negotiations, a whole passel of regulators Federal agencies are involved, including the Fed, the DoJ, the FDIC, and HUD). But while the talks were underway, the OCC decamped and launched its own cease and desist order process, which was intended to reduce the impact of the settlement from the federal regulatory side. And if you think that the OCC was not trying to advance the banks’ agenda, the language the OCC used in the C&D orders was cribbed from the banks’ counterproposal to the attorneys general.

Similarly, although I can’t prove it, I strongly suspect the OCC played a major role in the nuking of Elizabeth Warren. I am told she is a skilled bureaucratic infighter and had to have been aware of Geithner’s antipathy for her and hence would have been watching his game closely. The development that hurt her the most was the leak of a 7 page analysis prepared by the CFPB for the state AGs to Shahien Nasiripour, then of the Huffington Post. He anticipated the firestorm that resulted:

But perhaps most important to some lawmakers in Washington, the mere existence of the report suggests a much deeper link between the Bureau of Consumer Financial Protection, led by Harvard professor Elizabeth Warren, and the 50 state attorneys general who are leading the nationwide probe into the five firms’ improper foreclosure practices, a development sure to anger Republicans in Congress and a banking industry intent on diminishing the fledgling CFPB’s legitimacy by questioning its authority to act before it’s officially launched in July.

And that article indicated that the OCC and the CFPB were at loggerheads over the level of fine the servicing industry should pay, with the OCC of the view that it should be less than $5 billion.

Adam Levitin was quick to call out how phony-baloney the OCC’s servicer cease and desist orders were as soon as a draft was published back in April (emphasis his):

By far the most interesting bit in the draft C&D order is the bit requiring the banks to engage independent foreclosure review consultants to review “certain” foreclosures that took place in 2009-2010. There is no specification as to which foreclosures are to be reviewed or precisely what the standards for review are. But that’s all kind of irrelevant. Who do you think the banks are going to engage to do these reviews? Someone like me? Not a chance. They’re going to find firms that signal loud and clear that if they get the job, they won’t find anything wrong. It’s just recreating the auditor selection problem, but without even the possibility of liability for a crony audit…

So here’s what’s going down. The bank regulators are going to provide cover for the banks by pretending to discipline them very hard, but not really doing anything. The public will see a stern C&D order, but there won’t be any action beyond that. It’s as if the regulators are saying so all the neighbors can hear, “Banky, you’ve been a bad boy! Come inside the house right now because I’m going to give you a spanking!” And then once the door to the house closes, the instead of a spanking, there’s a snuggle. But the neighbors are none the wiser. The result will be to make it look like the real cops (the AGs and CFPB) are engaged in an overzealous vendetta if they pursue further action.

Levitin continues his scutiny with his latest post on the OCC’s coverup, which was sparked by theGretchen Morgenson story last weekend. That story suggested the supposedly independent foreclosure reviewers were every bit as compromised as Levitin had predicted. Levitin, based on what he called “the briefest of perusals” of the several engagement letters, including the Allonhill engagement letter (flagged by Michael Olenick), found plenty not to like. The first problem was, as he had indicated earlier, was rampant conflicts of interest. The second is that the entire process is bogus.

This is a partial recap from his post, which I strongly suggest you read in full. On the conflicts:

1. The OCC does not do any independent verification of claims re lack of conflicts. As Olenick described, they are bloomin’ obvious as far as Allonhill is concerned, and the defense they offered in the Morgenson story is not convincing.

2. The reviewers hire subcontactors who are similarly deeply compromised. You have multiple law firms, all of whom are major “securitization” law firms, which means they up to their eyeballs in opinion liability. Think they are going to find anything wrong when they have been advising the servicing industry all these years? Consider what Levitin wrote about SNR Denton, a firm that has made an art from of writing coverups for bad servicing/foreclosure practice (see our shred from 2010). Levitin catalogues some of its other whoppers:

It has also made clear that it thinks there is “nothing to see here folks” on the chain of title issue, and that it thinks Ibanez was a radical and wrong outlier decision. SNR Denton has also represented the American Securitization Forum. Hardly neutral counsel.

To add to Levitin’s tally: SNR Denton also represents LPS, which is has been indicted by the Nevada attorney general for civil fraud in a wide ranging and well documented case. And in a newly-published paper on Ibanez, Professor Elizabeth Renuart looks at the applicability of that decision in four major non-judicial foreclosure states: Arizona, California, Georgia, and Nevada. Her conclusion, contra SNR Denton, is “Ibanez should be persuasive authority in the four nonjudicial foreclosure states highlighted herein.”

But even worse is the procedural sham. It’s a deliberate effort to validate bogus foreclosure practices. Key points from Levitin:

It’s clear that none of the reviews will look at PSAs and trust law. The OCC doesn’t want anyone looking at this issue. It’s OK if the reviews find some SCRA [Servicemembers Civil Relief Act] violations and the banks pay a few dollars here and there. But the chain of title issues are too sensitive and OCC has made them a no-go….

Check out the assumptions and exceptions on pp. 13-16 in the JPMorgan-Deloitte letter. Some are kind of heroic, like that there was proper service. I testified about a “sewer service” problem before the House and Senate in November 2011. It’s not a non-issue. Or how about that notarizations took place on the date claimed. We know that isn’t always the case–that’s what started the whole robosigning scandal.

Other assumptions are strange. The review will only consider 2 federal statutes and state statutes, not local mediation requirements, etc. Sure, it makes the reviews easier. But those requirements are the law too. You can’t pick and choose which parts of the law to comply with.

In other words, this process is every bit as bad as one would fear, and blindingly obviously, shamelessly bad.

But the reason that the OCC can do this sort of thing is that much of their help to banks isn’t as visible as, say, HAMP mods (which were intended to give the appearance of helping borrowers while doing nada to change the fundamentals of the system in place). And the parts that are, like the engagement letters, take some knowledge to see the deficiencies. Now a journalist can easily get to experts, but what the OCC does, like a lot of regulatory nitty gritty, is deemed to be too technical to interest most readers. This is yet another example of how complexity and opacity serve the financial services industry.

The OCC is actively intervening on the side of banks to cover up their systematic abuse of the rule of law, and to minimize the cost to them when it is impossible to deny their bad conduct. The more that the public recognizes that the OCC is a bank enabler in regulator’s clothing, the harder it will be for them to be effective in that role.