Daniel Rosenbaum for The New York TimesFrom left, Konrad Alt of Promontory, James Flanagan of PricewaterhouseCoopers and Owen Ryan of Deloitte & Touche.6:32 p.m. | Updated
A multibillion-dollar consulting industry came under the spotlight in Washington on Thursday, as lawmakers questioned the quality and independence of companies that guide banks through regulatory scrutiny.
At a Senate Banking Committee hearing, lawmakers contended that the consulting business was fraught with conflicts. While banking regulators rely on consultants to help clean up financial misdeeds like money laundering and foreclosure abuses, the companies remain on Wall Street’s payroll.
“Consultants have a financial incentive to do things to attract repeat business,” Senator Sherrod Brown, the Ohio Democrat leading the hearing, said to a panel of regulators who testified.
Mr. Brown also took aim at consultants, citing some recent missteps. When regulators farmed out a review of foreclosure abuses to companies like the Promontory Financial Group and Deloitte & Touche, the consultants earned $2 billion in fees while scrutinizing only a sliver of the more than 800,000 troubled loans in question.
Money laundering cases have dogged the consultants, too. Lawmakers on Thursday alluded to an episode in August, when New York officials accused Deloitte of helping the British bank Standard Chartered cloak illicit transfers.
“If a consulting firm has routinely been at the scene of the crime, what will it take to be disqualified?” Mr. Brown asked.
Konrad Alt, a Promontory executive who testified on Thursday, said “it would depend on if they were at the scene of the crime as a witness, perpetrator or detective.”
The Senate hearing was the latest indication that federal regulators were facing pressure to rein in the consulting industry. Representative Maxine Waters, Democrat of California, also introduced legislation this week to impose conditions on the use of consultants, including progress reports and detailed cost estimates.
The scrutiny comes on the heels of the Government Accountability Office’s report that faulted regulators for the flawed foreclosure review. The regulators, the report said, failed to coordinate the review properly and potentially let some errors go undetected.
On Thursday, government officials signaled a willingness to change practices. In testimony before the Senate committee, the regulators voiced regret for outsourcing the foreclosure review to consultants paid by the banks, acknowledging for the first time that the government had “underestimated” problems plaguing the process.
“If we had it to do over again, we would take a different approach,” Daniel P. Stipano, a senior official at the Office of the Comptroller of the Currency, said at the hearing. “We’re going to come up with ways to do this better in the future.”
Lawmakers were skeptical. Mr. Brown, for one, focused on the agency’s lack of written standards for overseeing consultants. When Mr. Stipano acknowledged that the comptroller’s office had not yet “put pen to paper,” Mr. Brown remarked: “I hope that part starts this afternoon.”
Lawmakers also urged Mr. Stipano to identify an unnamed consulting firm that had been singled out for poor performance during the foreclosure review. While regulators wrote to the firm to complain about the conduct, they did not fire the consultant.
Mr. Stipano balked at naming the consultant. “I’m not in a position to do that,” he said, adding that “there are certain legal consequences for us if we do that.”
(Promontory, Deloitte and PricewaterhouseCoopers executives who testified on Thursday denied that their firms were the anonymous consultant in question.)
Senator Elizabeth Warren, the Massachusetts Democrat who sits on the banking committee, chided the regulators for resisting.
“Without transparency, we can’t have any confidence in either your oversight or that the markets are working at all,” Ms. Warren said. “People want to know that the regulators are looking out for the American public and not the banks.”
Lawmakers also questioned the huge payouts for consulting firms. In some cases, according to people briefed on the matter, Promontory is known to charge up to $1,500 an hour.
During the 14-month foreclosure review, the consultants collected more than $2 billion in fees, far outpacing initial estimates, Mr. Brown said. He revealed that some firms originally pegged the cost at $5 million to $8 million.
“You work for the banks, they pay you, and yet you’re supposed to represent the public interest,” Mr. Brown said to the consultants.
James F. Flanagan, a PricewaterhouseCoopers executive who testified on Thursday, said his firm had earned $190 million from U.S. Bank, $175 million from Citigroup and $60 million from Sun Trust.
Owen Ryan, of Deloitte, declined to say what his firm had earned from JPMorgan Chase. Mr. Alt said he was unsure how much Promontory had collected from PNC, Bank of America and Wells Fargo.
He did, however, acknowledge that there was an “inherent conflict” and that lawmakers were “right to focus upon it.” Mr. Alt added, “There are checks in a process like this to try and mitigate that conflict and make sure that it does not become problematic.”