Justice Department Claims $25 Billion Foreclosure Settlement Reached with Largest Mortgage Servicers

According to a U.S. Department of Justice press release, the federal government and 49 state attorneys general have reached a $25 billion settlement agreement with the nation’s five largest mortgage servicers to settle claims over alleged mortgage loan servicing and foreclosure abuses. If reports are correct, the agreement, which Attorney General Holder called the “the largest joint federal-state settlement ever obtained,” compels the mortgage servicers to adhere to extensive new servicing standards and provides considerable financial relief for homeowners. Only Oklahoma failed to join in the settlement.  

Dykema will be producing a more detailed analysis of the terms of the settlement agreement shortly after it is released.

New Extensive Requirements on Mortgage Servicers

The agreement requires the nation’s five largest mortgage servicers—Bank of America, Wells Fargo, J.P. Morgan Chase, Citigroup, and Ally Financial—to implement certain enumerated changes in how they service mortgage loans, handle foreclosures, and to ensure the accuracy of information provided in federal bankruptcy court. According to the Department of Justice release, these requirements create new consumer protections, including requirements that the mortgage servicers: 

• Stop what the government characterizes as “foreclosure abuses,” which the government describes as robo-signing, improper documentation and lost paperwork through new mortgage servicing standards;
  Exercise greater oversight of foreclosure processing, including of third-party vendors;
• Impose additional standards to ensure the accuracy of information provided in federal bankruptcy court, including pre-filing reviews of certain documents; 
• Make foreclosure a “last resort,” by requiring servicers to evaluate homeowners for other loan mitigation options first (even though this was largely a practice already in place);
• Restrict banks from foreclosing while the homeowner is being considered for a loan modification (in other words, ending of “dual tracking”), thereby greatly increasing the amount of time a borrower can avoid paying anything while remaining in the home;
• Set procedures and timelines for reviewing loan modification applications, and give homeowners the right to appeal denials; and
• Create a single point of contact for borrowers seeking information about their loans and adequate staff to handle calls.

Enforcement and Compliance

The agreement appoints Joseph A. Smith, Jr. as a special monitor of the agreement. Smith is North Carolina’s Commissioner of Banks, who is also the former Chairman of the Conference of State Banks Supervisors, and will oversee implementation of the servicing standards required by the agreement. Smith’s authority evidently will include the power to impose penalties of up to $1 million per violation (or up to $5 million for certain repeat violations) and to publish regular public reports that identify any quarter in which a servicer fell short of the standards imposed in the settlement.

The agreement offers servicers incentives to provide relief to borrowers within the first 12 months of the agreement and imposes penalties of additional cash payments for any servicer that fails to meet its obligation within three years.

The settlement agreement will be filed as a Consent Judgment in the United States District Court for the District of Columbia and remain in effect for three-and-a-half years.

Limited Immunity for the Mortgage Servicers

The agreement provides the mortgage servicers with relief from certain violations of civil law based on the banks’ mortgage loan servicing activities. The agreement, however, apparently does not grant immunity to the mortgage servicers from:

• Criminal enforcement actions by the United States and the state attorneys general;
• Securities claims by the United States related to misrepresentations of the quality of loans that were packaged into mortgage-based securities or the conduct that is the focus of the new Residential Mortgage-Backed Securities Working Group;
• Claims by the states related to securitization activities and MERS;
• Loan origination claims by the United States to recover losses—and penalties—caused to the federal government when a bank failed to satisfy underwriting standards on a government-insured or government-guaranteed loan, with the exception of certain faulty origination practices by Bank of America on FHA-insured loans; or
• Claims by individual borrowers who wish to bring their own lawsuits.

Assistance to Homeowners

The listed servicers agreed to commit a total of $25 billion to homeowners and state and federal governments. $20 billion will be dedicated to borrowers in the following ways:

• At least $10 billion will be dedicated to reducing the principal for certain borrowers who owe more on their mortgages than their homes are worth;  
• At least $3 billion will be dedicated to a refinancing program for certain borrowers; and
• Up to $7 billion will be dedicated to other forms of relief, including forbearance of principal for unemployed borrowers, anti-blight programs, short sales and transitional assistance, benefits for service members who are forced to sell their homes at a loss as a result of a Permanent Change in Station, and other programs.
  

The servicers will also be required to offer additional protections and benefits to service members.

Cash Payments to the States and Federal Government

The servicers are also required to make $5 billion in cash payments to the states and federal government, in the following manner:

• $1.5 billion “Borrower Payment Fund” will be established to provide cash payments ranging from $1,500-$2,000 to certain borrowers whose homes were sold or taken in foreclosure.
• $2.75 billion will go to state and federal governments to be used to repay public funds lost as a result of servicer misconduct, fund housing counselors, legal aid, and other similar purposes determined by state attorneys general.
• $750 million will go to the federal government and will be primarily allocated to the FHA Capital Reserve Account, with portions also going to the Veterans Housing Benefit Program Fund and to the Rural Housing Service.

Should you have any questions about this settlement agreement or need additional information, please contact Don Lampe, Leader of the Firm’s Financial Services Regulatory and Compliance Practice, at 704-335-2736, or Frederick Levin or Jeff Jamison, the co-authors of this alert, at 213-457-1837 or 312-627-2101 respectively.

For more information about Dykema’s Consumer Financial Services practice, please contact Richard Gottlieb, Leader of Dykema's Financial Industry Group, at 312-627-2196, Don Lampe, or any of the listed attorneys.

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