$25B Settlement Agreement Reached With 5 National Banks Over Foreclosure Practices

WASHINGTON, D.C. - (Mealey's) The U.S. Department of Justice (DOJ) announced Feb. 9 that the federal government, attorneys general from 49 states and five national banks have reached a $25 billion settlement to resolve issues stemming from the lenders' allegedly fraudulent foreclosure practices and to help troubled borrowers by reducing the amount they owe on their homes.

U.S. Attorney General Eric T. Holder, Housing and Urban Development (HUD) Secretary Shaun Donovan, the HUD Office of the Inspector General, state attorneys general and state banking regulators participated in the investigation.  The lenders involved in the agreement are Wells Fargo & Co., Bank of America N.A., JPMorgan Chase Bank N.A., Ally Financial Inc., formerly known as GMAC, and Citigroup Inc. 

In addition to providing relief to troubled borrowers, the agreement resolves claims that the lenders violated certain civil laws when servicing mortgage loans but does not prevent state or federal authorities from pursuing criminal actions based on that conduct.  Under the agreement, the lenders are required to implement new mortgage loan servicing standards and to commit to resolving state and federal law violations stemming from their use of "robo-signing," a process in which fraudulent affidavits were used to initiate foreclosure proceedings.   

The lenders are also required under the agreement to offer financial relief to borrowers by reducing the principal balance on their loans if the borrower is either delinquent or at imminent risk of default.  Borrowers whose loan balances are greater than the value of their homes are also eligible for principal reductions under the settlement.  The DOJ's statement explains that $3 billion of the settlement will go toward refinancing loans for borrowers who are current on their loan but who owe more on their mortgage than their home is worth. 

Borrowers who are paying higher interest rates also will be eligible to refinance their loans at lower interest rates by meeting basic criteria, according to the agreement. 

Moreover, approximately $7 billion would be used toward other forms of foreclosure relief, such as forbearance of principal for unemployed borrowers, anti-blight programs, short sales, benefits for service members who are forced to sell their homes as a result of a change of stationing and other programs. 

Under the agreement, the lenders also agreed to pay $5 billion to federal and state governments to establish a borrower payment fund and to repay public funds lost as a result of servicer misconduct.  The borrower payment fund would supply cash payments to borrowers whose homes were sold or taken in foreclosure between Jan. 1, 2008, and Dec. 31, 2011, and who meet a certain set of criteria.  Another portion of the $5 billion would go toward an investigation of the origination and underwriting of Federal Housing Authority (FHA)-insured loans generated and appraised by Bank of America and entities of Countrywide Home Loans Inc. between Jan. 1, 2003, and April 30, 2009. 

Lastly, the agreement requires the lenders to set new standards for servicing loans.  Under the new standards, borrowers are required to evaluate homeowners for loss mitigation first and are restricted from foreclosing while a borrower is being considered for a loan modification.  During the loan modification process, the lender is required to provide a single point of contact for borrowers seeking information about their loans.  The agreement also provides enhanced protections for service members beyond those required by the Servicemembers Civil Relief Act (SCRA). 

The consent agreement will be filed in the U.S. District Court for the District of Columbia, and compliance will be overseen by Joseph A. Smith Jr., an independent monitor who served as North Carolina commissioner of banks since 2002 and is also the former chairman of the Conference of State Banks Supervisors. 

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