U.S. Efforts to Regulate Consultants Face Big Obstacles Federal regulators are facing pressure from Capitol Hill to rein in a multibillion-dollar consulting industry after the companies stumbled during their recent review of mortgage foreclosure abuses. But the efforts could be stymied, given regulators" close ties to consultants and limited legal authority to penalize them. The early signs are discouraging, lawmakers say. After concerns surfaced that a consulting firm was bungling the broad review of foreclosures, regulators wrote to the firm, complaining about the conduct but did not fire the consultant, said Congressional officials with knowledge of the matter who were not authorized to speak publicly. The use of consultants, who are paid by the same banks they are expected to help reform, will be examined at a Senate Banking Committee hearing on Thursday. Senator Sherrod Brown, the Ohio Democrat leading the hearing, is examining whether regulators inappropriately "outsource" oversight like the foreclosure review to consultants like Deloitte & Touche and Promontory Financial Group. Since the foreclosure review was scuttled in January, some regulators have been exploring new ways to curb the use of consultants and correct problems that occur, according to testimony prepared for the hearing. "While the use of independent consultants can be an effective supervisory tool, there are certainly lessons to be learned from our experience, and we believe we can improve the process going forward," Daniel P. Stipano, a senior official at the Office of the Comptroller of the Currency, said in the testimony. The agency plans to "enhance our oversight of the consultants when they are utilized," he said. But challenges remain. Mr. Stipano is expected to cite legal limitations that undercut the regulator's authority over consultants. Those constraints stem from 2006 when the comptroller's office levied a $300,000 fine against Grant Thornton, a firm that audited the books of First National Bank of Keystone in West Virginia, which collapsed in 1999. Grant Thornton, the comptroller found, ignored "unequivocal, written evidence" that the bank had not accounted for much of its assets, a major discrepancy that the consultant did not flag. When the firm challenged the fine, a federal appeals court in Washington overruled the comptroller. The court said that the regulator had "exceeded his statutory authority." At the hearing on Thursday, Mr. Stipano is expected to petition lawmakers for greater authority. In the prepared testimony, he said the comptroller's office "would welcome a legislative change in this area that would facilitate our ability to take enforcement actions directly against independent contractors that engage in wrongdoing." Even if regulators gain new powers to curb the use of consultants, their ties to the firms may prove difficult to untangle. Since the financial crisis, the comptroller has ordered banks to hire consultants in more than 130 enforcement actions, or roughly 15 percent of the cases, an analysis of government records shows. Further complicating the relationships, consultants like Promontory have forged close ties to the regulators, routinely hiring from government ranks. Promontory was founded by Eugene A. Ludwig, a former comptroller of the currency. Last week, it hired Mary L. Schapiro, who led the Securities and Exchange Commission until late last year. In addition to Deloitte and PricewaterhouseCoopers employees, a Promontory executive, Konrad Alt, will testify at the Senate hearing. Mr. Stipano, of the comptroller's office, will be joined by Richard M. Ashton, deputy general counsel at the Fed. The hearing will occur a week after the Government Accountability Office issued a scathing report faulting regulators for the flawed mortgage foreclosure review. The regulators, the report found, failed to properly coordinate a review of foreclosed loans and potentially allowed some errors to go undetected. Adding to the scrutiny, Senator Elizabeth Warren, Democrat of Massachusetts, and Representative Elijah E. Cummings, Democrat of Maryland, are pushing regulators to explain what went wrong with the foreclosure review. Regulators stopped the review in January after consultants had scrutinized only 114,000 of the more than 800,000 troubled loans they had been expected to review, the lawmakers said. When the lawmakers pressed for greater detail on the problems, regulators balked. The regulators, for example, refused to provide the name of the consultant who had been admonished, but not fired, for shoddy work. In a letter to the regulators on Wednesday, the lawmakers rebuked the Federal Reserve and the comptroller's office for the resistance. "Your staff would not elaborate" even after finding the consultant's work was "so poor that you issued a letter faulting the company and directing it to cure its deficiencies," according to a copy of the letter reviewed by The New York Times. The letter also criticized the regulators for shielding the banks. When asked to detail the number of illegal foreclosures at each bank, the regulators declined, arguing that the information amounted to "trade secrets." Lawmakers excoriated the argument, declaring in their letter that "breaking the law is not a corporate trade secret." The dispute, officials note, occurred because regulators are hesitant to provide detailed information derived from their supervision of banks. Such documents are typically confidential. The comptroller's office and the Fed declined to comment. Representative Maxine Waters, Democrat of California, is also attacking the regulators" reliance on consultants. While regulators must grapple with finite resources, forcing them to hire outsiders for certain responsibilities, Ms. Waters argues that federal authorities should adopt stricter oversight measures. Mr. Alt rejected the notion that Promontory is beholden to banks it helps. "We are working for the regulator," he said. If we merely told our clients what they want to hear, we would lose credibility. But Ms. Waters on Wednesday introduced legislation to impose conditions on the use of consultants, including progress reports and detailed cost estimates. "The situation clearly requires a legislative remedy," she said on Wednesday. This is not independence - it is work for hire.