WASHINGTON — Several prominent Republicans, including Sen. Richard Shelby, the Senate Banking Committee's top GOP member, sharply criticized a proposed settlement between the five largest mortgage servicers and state and federal agencies, arguing that the government authorities were trying to usurp Congress' role.
In an opening statement at a hearing on the state of the housing market, Shelby called the 27-page term sheet that the state attorneys general gave banks a "regulatory shakedown" to "advance the administration's political agenda."
Shelby claimed regulators were seeking $30 billion in damages from servicers, instead of the $20 billion sought by the Consumer Financial Protection Bureau. (The damages number is a source of contention among regulators and has not been finalized.)
"Under the guise of helping homeowners hurt by improper foreclosures, regulators are attempting to extract a staggering payment of nearly $30 billion for unspecified conduct," Shelby said. "Setting aside for a moment the attempt to end-run Congress, I question whether removing $30 billion in capital through a backdoor bank tax is the best way to jump-start lending. The long-term consequences of this settlement could be even more serious. It would politicize our financial system."
House GOP leaders, including Financial Services Committee Chairman Spencer Bachus and Rep. Scott Garrett, R-N.J., were set to send a letter to Tim Geithner, secretary of the Treasury Department, taking issue with the proposed settlement.
"The breadth and scope of the draft settlement proposal raise significant concerns about its effect on the financial system, as well as concerns that the administration and state agencies are attempting to legislate through litigation," a copy of the letter obtained by American Banker says.
Both Shelby and House GOP lawmakers specifically questioned the role of the CFPB in negotiating the settlement, noting the agency does not technically assume power until July and is headed by Elizabeth Warren, who was appointed by the administration rather than nominated and subjected to the Senate confirmation process.
"Just last year, I warned that the new bureau of consumer financial protection would prove to be an unaccountable and unbridled bureaucracy. I did not expect to be proven correct so quickly," Shelby said.
Although they did not mention Warren by name, House lawmakers asked Geithner to explain the role of "political appointees" in the settlement.
"Reports about the role played by political appointees in the Treasury Department — including those affiliated with the Consumer Financial Protection Bureau, an agency that does not yet have any regulatory or enforcement authority — raise further question about the process through which the terms of the settlement are being negotiated," the lawmakers said.
State AGs and the CFPB continue to negotiate with the servicers. Several banks have suggested the government's demands go too far, and have indicated they will fight back. Political support by leading Republicans would undoubtedly strengthen their hand.
Both Shelby and the House lawmakers echoed banker complaints that the 27-page term sheet was too sweeping and would fundamentally rework the servicing industry without legislation or going through the normal regulatory process.
"The process by which it is being imposed is potentially far more concerning," Shelby said. "The proposed settlement would fundamentally alter the regulation of our banks. Yet, this would be done without congressional involvement. Instead, it would be done by executive fiat through intimidation and threats of regulatory sanctions."
Shelby urged the banks to fight back.
"The administration and our financial regulators are clearly hoping the banks will consent to these new regulations," Shelby said. "The precedent these strong-arm tactics could set, however, should be of concern to all citizens. If these tactics can be used successfully on financial institutions, they can be used on any business."
House GOP lawmakers wrote that the enforcement action traditionally imposes remedies for restitution to victims for specific crimes. But they said this term sheet goes well beyond that.
"The settlement agreement not only legislates new standards and practices for the servicing industry, it also resuscitates programs and policies that have not worked or that Congress has explicitly rejected," the letter says.
The letter mentions the Home Affordable Modification Program, which the House GOP is trying to eliminate under a bill passed by the Financial Services Committee on Wednesday. Under the term sheet, the state AGs would force servicers to make changes to how they offer workouts under Hamp, including speeding up the process to give troubled borrowers permanent modifications.
The letter asks Geithner to respond to 11 questions on the settlement by March 18, including what authority regulators have to mandate principal reductions and effectively create new standards for the servicing industry. Lawmakers are also questioning the role of the CFPB, which the term sheet says would monitor and enforce much of the agreement.