WASHINGTON — Bank regulators, law enforcement and various other federal and state officials continue to negotiate the proper punishment for more than a dozen large servicers that have mistreated mortgage borrowers.
While some reports claim an agreement is imminent — along with an enormous $20 billion fine — the truth is nothing is yet set in stone, and the situation is changing daily. We offer the following frequently asked questions to help sort fact from hyperbole.
Are servicers being hit with a $20 billion fine?
No. Regulators have not agreed on a dollar figure, and $20 billion is in the words of one source involved in the negotiations "a crazy figure."
Some banking regulators are arguing against an amount that high; it seems the big force behind a huge number is the Consumer Financial Protection Bureau and the state attorneys general.
A monetary penalty will no doubt be levied, but government officials disagree over what the fine should cover. Bank regulators see it as a penalty for being sloppy while other officials see the money as a way to repay wronged borrowers. On Thursday, regulators on both sides said an agreement has not been met.
Keep in mind, too, that in order for this to be a global settlement, all of the government entities involved would have to agree, as would the banks. While banks acknowledge their servicing systems need improvement, they continue to argue that the vast majority of foreclosures were justified.
Well, what has happened since the news broke last week?
The federal banking regulators have sent draft cease and desist orders to 14 servicers detailing problems they uncovered during their investigation, including flawed processes, violations of state law and robo-signing concerns. The C&D letters do not include a fine, but instead focus on corrections regulators are seeking. Those include the creation of a single point of contact for delinquent borrowers and a designation of who is properly authorized to operate as the servicer of a loan.
Why are the C&D orders in draft form?
Regulators typically give banks notice of problems they want fixed before a public C&D is released in case the institution wants to mount a defense.
Frequently, institutions will negotiate specific charges and proposed fixes. Currently, the banks are primarily concerned the C&Ds will expose them to civil suits arising from foreclosure problems. It is also unclear whether the agreements will be consistent for all 14 institutions or if they will be tailored to problems at each. Some information about the C&Ds may come relatively soon as banks make scheduled Securities and Exchange Commission filings.
Wait. Shouldn't the C&Ds include the fine?
Normally, yes. Regulators usually disclose a fine at the same time as they take a public enforcement action. But the banking regulators are still figuring out whether they are going to time the release of the C&Ds with the global settlement that includes other government agencies and the state AGs. It appears that the Office of the Comptroller of the Currency and Federal Reserve Board are willing to press ahead with the C&Ds and defer a fine until the global settlement is worked out.
But the banks are unlikely to agree to that. From their point of view, it is better to have the issue settled on a single day of bad public relations than get hit first with a C&D and then later with a fine.
"The banks are not going to agree to any part of the settlement unless they have everything," said Ron Glancz, a partner at Venable LLP. "You want a global settlement. You want to put this behind you."
I read the settlement will include principal reductions. Is that true?
Not yet. While it's true that some agencies want to force the banks to cut principal on troubled loans, that issue is one of several that's unsettled. It is clear that any settlement will include some kind of enhanced modification program. The Federal Deposit Insurance Corp., for example, has been pushing a program that would streamline modifications in return for a clearer path to foreclosure if the borrower redefaults.
But the banks are adamantly opposed to forced principal reductions, and it's unclear if regulators can make them, especially since the agencies don't even agree. The CFPB and Department of Housing and Urban Development want a strong principal reduction program, but the OCC wants to instead focus on fixing safety and soundness problems.
So what does the Obama administration want?
That depends on how you define the administration. Is it the Treasury Department, HUD, CFPB or the Justice Department?
It's not clear that all the administration's agencies are on the same page, much less the independent players like the Fed, OCC, FDIC or the state attorneys general.
Why is so much of this playing out in public?
When government agencies disagree, they frequently leak "facts" in an effort to gain leverage for their side of the argument. So, for example, those agencies pushing for a steep fine benefit from the Wall Street Journal reporting a $20 billion figure. Why? Because if regulators ultimately settle on a significantly lower number, it looks weak in comparison. Similarly, saying the government plans to mandate principal reductions creates an expectation that will take place and puts pressure on banks to agree to it. Until the government announces a final deal, you should be skeptical of any article that sounds too definitive about what is taking place (unless you read it in American Banker, of course.)
Why is this taking so long?
Simple — there are a lot of players involved, and few of them agree with each other. The banks have only just been included in negotiations, further slowing the process.
"We have been meeting and dealing with this every day and we are getting close to a critical point of negotiations where we would like to see this end," said Geoff Greenwood, a spokesman for Iowa Attorney General Tom Miller, who is leading the states' investigation.
We "have yet to present that to the banks or for that matter to those we are working with…. We are not that close to an agreement....Nothing has been finalized by the states and it is our understanding the federal agencies have not finalized their position either."