Federal regulators and 49 state attorneys general are close to finalizing a legal settlement with top banks that did not sign the $25 billion national mortgage settlement a year ago to settle allegations of "robo-signing," Housing Secretary Shaun Donovan said Wednesday.
The Department of Housing and Urban Development will make an announcement "in coming weeks," Donovan said during a conference call with reporters to discuss the first compliance report from Joseph A. Smith, the settlement's monitor.
The $25 billion settlement already covers the top five banks, but does not include at least nine other institutions, including PNC Financial Services, U.S. Bancorp (USB), SunTrust Banks (STI) and HSBC Holdings, that have signed regulatory orders related to servicing issues. The Justice Department has approached several banks about joining the national settlement rather than face potential government lawsuits. Donovan did not identify which institutions may join the settlement.
Much of the press conference was focused on how regulators were going to hold the participating banks responsible for violating the terms of the settlement. Four state attorneys general, who joined Donovan, appeared unlikely to follow the lead of New York Attorney General Eric Schneiderman, who announced plans earlier this month to sue Bank of America (BAC) and Wells Fargo (WFC) for more than 300 instances of alleged noncompliance.
Colorado Attorney General John Suthers said the settlement allows for remedies that would preclude a lengthy court battle, if it came to that. If any of the five servicers fails to fix a violation within a six-month time frame, the monitor can assess civil penalties of up to $1 million or in certain circumstances, $5 million.
"The ability of the monitor to impose very substantial fines is a serious incentive to the banks to comply and will make litigation unlikely," Suthers said.
B of A, Citigroup (NYSE:C) and JPMorgan Chase (JPM) were each criticized in the monitor's compliance report for multiple violations of basic servicing standards such as failing to notify loan modification applicants of missing documents and starting the foreclosure process without notifying borrowers. Wells Fargo failed one of the monitor's 29 metrics while Ally Financial, which is 74% owned by the government, met all the requirements.
The four banks with violations are developing plans to fix their problems.
"The violations are significant so the process seems to be working," said Smith, adding that "the whole loan modification process needs more work."
Kevin Stein, associate director of the nonprofit California Reinvestment Coalition, said he was surprised that more violations were not found.
"There continues to be a fairly large gap between what the monitor is reporting and what borrower and housing counselors are experiencing on the ground," Stein said.
Kevin Whelan, the national campaign director at the non-profit Home Defenders League, cited the nearly 60,000 consumer complaints received by Smith's office as proof that banks are still failing in basic areas such as handling paperwork.
"The goal of the settlement was not to just identify the bad practices but to stop what is still an enormously destructive set of policies and abuses that are continuing," said Whelan. "Banks are still abusing their customers and are continuing practices that they agreed to stop as a condition for not being prosecuted for massive foreclosure fraud."
So far the top five banks have distributed $50.6 billion in consumer relief to 620,000 homeowners, including $1.5 billion in checks that were mailed last week, Donovan said. Iowa's Attorney General Tom Miller said the amount far exceeds the original estimate of $36 billion.
Miller is negotiating with the five banks to change the process of dual-tracking to allow borrowers who have met minimum requirements for getting a loan modification to stop the process of simultaneously being put into foreclosure. Smith also plans to add several additional metrics or tests involving single point of contact, borrower records and minimum loan mod requirements.
Donovan cited "many, many examples" of homeowners who were harmed because they were incorrectly denied loan modifications that caused them to fall further behind on their mortgage and in some cases to lose their homes to foreclosure.
Servicers "engaged in abusive behavior that often did not give homeowners a chance to fight off foreclosure," Donovan said, even as he praised the monitor's report as the first-ever "public report card" to track banks' progress on servicing standards. "For too long banks have been operating behind closed doors making it hard for the public to know what they are up to."
He also said attorneys general are looking into claims that Bank of America rewarded employees with cash bonuses and gift cards for delaying or refusing to give borrowers loan modifications.
A B of A spokeswoman called the allegations "absurd, patently false and contrary to Bank of America's long-standing policy only to foreclose as a last resort when other available options to help keep people in their home have been exhausted."