Blame Abounds Over a Flawed Foreclosure Review

Private consultants and federal regulators are facing a fresh round of scrutiny in Washington after botching a broad review of foreclosures and failing to thwart financial misdeeds.

A new report by the Government Accountability Office will take aim at the Federal Reserve and the Office of the Comptroller of the Currency for creating a bureaucratic maze that delayed relief to homeowners in foreclosure, according to a draft of the 74-page document provided to The New York Times. The regulators, the report found, designed a flawed review of troubled loans that the consultants carried out and mishandled.

Adding to the scrutiny, the Senate Banking Committee plans to hold a hearing next week to examine the foreclosure review and other recent missteps at consulting firms like Promontory Financial and Deloitte & Touche, according to several people with direct knowledge of the matter. Senator Sherrod Brown, the Ohio Democrat leading the inquiry, is expected to broadly question the quality and independence of consulting firms that are paid billions of dollars by the same banks they are expected to police.

Regulators at the Fed and the Comptroller of the Currency’s office are likely to testify at the hearing, which is scheduled for April 11, according to the people briefed on the matter but not authorized to speak publicly. Mr. Brown’s office is also expected to invite executives from Promontory and Deloitte to testify.

The Senate hearing comes at a difficult time, particularly for the consultants. Regulators at the Fed and the Comptroller of the Currency’s office are questioning the prudence of relying on consultants so heavily, according to government officials briefed on the matter.

While regulators will continue requiring banks to hire consultants in times of stress, some officials say they are worried about the quality of the work. New York’s banking regulator, Benjamin M. Lawsky, is also investigating the use of consultants and could seek to impose greater oversight of the firms, a person briefed on the matter said.

Deloitte did not respond to a request for comment. In a previous statement, a spokesman for the firm said, “Deloitte fully stands behind the quality and integrity of its work on behalf of regulatory authorities.”

Promontory also issued an statement earlier that said, “From Day 1, Promontory strove to conduct its review work as thoroughly and independently as possible.”

The recent regulatory scrutiny represents a significant change for consultants, which have long enjoyed a privileged status in Washington. Promontory, which is run by the former comptroller Eugene Ludwig, announced this week that it had hired Mary L. Schapiro, the former chairwoman of the Securities and Exchange Commission. She was the latest official to move from a top government post to a consulting firm, a revolving door that has raised concerns about whether federal authorities will look the other way when consultants err.

The most recent problems emerged when the consultants — under orders from regulators to assess whether homeowners had been wrongfully evicted — racked up more than $2 billion in fees despite reviewing only a small fraction of foreclosed loans. The consultants’ delays and inefficiencies caused homeowners to languish and prompted regulators to scuttle the review and settle with banks for $9.3 billion. Even now, millions of homeowners have yet to receive relief. Last week, banks learned that the government would miss its internal deadline to issue checks to borrowers, according to people briefed on the matter. While authorities initially planned to release the payments to 4.2 million homeowners at the end of March, technical problems forced a temporary delay.

Melissa Jaime, 40, has been battling to save her home in Queens for three years. In the foreclosure fight, she has gone to court more than 21 times, aiming to reduce her monthly payments. “To me, this all sometimes feels like a cruel game,” she said.

The tales of anguished homeowners have prompted an outcry on Capitol Hill.

Senator Elizabeth Warren, Democrat of Massachusetts, and Representative Elijah Cummings, Democrat of Maryland, recently opened an inquiry into the consultants’ flawed review of foreclosure abuses. Representative Carolyn B. Maloney, Democrat of New York, also pressed regulators to disclose the consultants’ fee structure for the review.

Ben S. Bernanke, the chairman of the Fed, and Thomas Curry, the comptroller of the currency, replied to her request last week without detailing the payments or revealing the results of the review, saying that “we are currently in the process of developing and analyzing this information,” according to a copy of the letter.

Still, the regulators have not escaped criticism for their role in the bungled foreclosure review. The G.A.O.’s report traces problems to the regulators, not the consultants.

Throughout the review, the regulators provided inconsistent guidance to consultants, the report said. As a result, borrowers in similar situations were sometimes treated differently. For example, regulators ordered the consultants to comb through loans to spot whether borrowers had been charged fees for lawn care or property inspections that were not “reasonable” and “customary.” But the consultants were using different versions of what fees fell into those categories.

The report also faulted regulators for bogging down consultants with numerous metrics for identifying problems. One consultant reported having to answer 16,000 test questions regarding a single loan.

Homeowners paid the price, the G.A.O. report concluded. Struggling borrowers submitted requests for relief and “waited nearly a year before receiving an update,” the report said.

The flaws also created “timeliness trade-offs,” according to the report. Under the review guidelines outlined by the regulators, swaths of loans that might have had problems were potentially overlooked, the report found.

Representative Maxine Waters, the California Democrat who requested the report, said in a statement on Wednesday that she would soon “introduce legislation to address the problem of relying on outside contractors for enforcement actions.”

The regulators did not comment on the report, though they have previously said that the review was an ambitious undertaking intended to provide the first full assessment of wrongful foreclosures in the wake of the financial crisis.

In a statement to the G.A.O., Mr. Curry’s office said it “appreciates your understanding of the complexity” of the foreclosure review process and the “intent of your recommendations.” The office added that it would incorporate suggestions from the report into its future oversight of the banks. The Fed told the G.A.O. that it has “begun implementation of all recommended actions.”

Next week, the Senate hearing is likely to focus on the roles of both the regulators and the consultants. Using the foreclosure review as a starting point, Mr. Brown is expected to question regulators’ reliance on the industry.

The consultants, critics note, operate with scant supervision and produce mixed results. In one instance, Deloitte was accused of enabling Standard Chartered, a British bank, to process tainted money through the American financial system, a subject that Mr. Brown is expected to scrutinize.

The consultants also keep cozy ties to the banks they oversee. “It is worth considering the monitors’ lack of independence,” Mr. Lawsky said at a recent speech in Washington. “The monitors are hired by the banks, paid by the banks, and depend on the banks for future engagements.”