WASHINGTON — Frustrated by the lack of progress with a global settlement between the 50 state attorneys general and the top mortgage servicers, federal banking regulators are expected to move forward with their own enforcement actions against 14 servicers as early as next week.
The cease and desist orders are expected to establish best practices for the servicing industry, including new documentation verification procedures, oversight from third parties and additional legal counsel, limitations for dual tracking foreclosures and modifications simultaneously, and a comprehensive look back to uncover prior mistakes.
The regulators' move comes as bankers offered their own counterproposal to the state AGs that echoes much of what the banking regulators are seeking. While bankers and enforcement officials had agreed a single global settlement with all state and federal agencies would be optimal, the cease-and-desist order may ultimately help the servicers by serving as a template for a final deal with the other agencies.
Some observers said it makes sense for the banking regulators to act as talks between the state AGs and the servicers have dragged on.
"The bank regulators have responsibility for the oversight of the banks and where they have gone in and determined there were weaknesses they have an obligation to address them," said Jeffrey Naimon, a partner at BuckleySandler LLP. "While a comprehensive settlement is preferable, the bank regulators … can't just wait around. They have to do something and I think they are going to move forward."
The cease-and-desist action is not expected to include a large fine as the state AGs are seeking, but instead will order banks to offer remediations to any homeowners found harmed after they perform a comprehensive look back at their own files. Such look backs, which are common in other enforcement actions such as anti-money-laundering orders, require banks to closely examine previous cases in light of flaws uncovered by regulators in their internal procedures.
Observers were split on whether a separate move from the banking regulators would help or hurt the servicers.
"It would be better for everybody if the bank regulators, state AGs, Justice and HUD can reach closure at the same time," said Michael Barr, a professor at the University of Michigan and a former Treasury assistant secretary in the current administration. "It would be better for the banks to do that. It would be harder for the banks to put this foreclosure mess behind them if they have piecemeal approaches."
But some said a separate action benefits the servicers, which will have more leverage to push back against the state AGs. Since the AGs first issued a 27-page proposed term sheet in March, the banks have argued it went too far and did not detail what exactly they did wrong. The cease-and-desist order includes details on what regulators uncovered during their investigation of servicer practices and ways they must be fixed.
"It sets the bounds for the attorneys general," said Gil Schwartz, a partner at Schwartz & Ballen LLP. "How are the attorneys general to say the banking agencies didn't go far enough and want more? The federal settlement seems to me establishes a ceiling that would apply to the attorney general settlement."
Cliff Rossi, a professor at the Robert H. Smith School of Business at the University of Maryland, said the longer a negotiation with the AGs drags out, the better off bankers will be.
"There could be years to wrangle over this," he said. "You have a number of constituents. … I don't think this thing is going to go away quietly any time soon. With the federal banking regulators [done], what is the incentive for the banks and the state AGs to come to the table? I would certainly wait and see how this happens and maybe we can come to an easier settlement. I would play the stall game as long as I can get by with it."