Even before regulators unveiled a foreclosure review settlement this morning, critics were complaining that it was flawed. If there's a silver lining in the deal — which was put together by the Office of the Comptroller of the Currency and Federal Reserve — it's that many banks and consumer advocates hated even more the foreclosure review process that the settlement replaces.

Under the deal announced Monday morning, the 10 servicers will pay $3.2 billion to borrowers and offer an additional $5.5 billion in unspecified "other assistance," which might include loan modifications and other foreclosure alternatives.

"The participating servicers would cease the Independent Foreclosure Review, which involved case-by-case reviews, and replace it with a broader framework allowing eligible borrowers to receive compensation significantly more quickly," a joint press release by the OCC and Fed says. "Eligible borrowers are expected to be contacted by the payment agent by the end of March with payment details."

Left unanswered is the crucial question of how regulators will determine who gets the money — a sticking point that made the previous foreclosure review process unworkable. Regulators say that under the new agreement they will appoint a settlement coordinator and that borrowers will be eligible for cash payments of up to $125,000.

Under the original program, hundreds of thousands of requests for loan reviews remain unprocessed. Bank foreclosure consultants and borrower advocates have argued that it's impossible to reliably identify those harmed by foreclosure mistakes without inspecting loan files.

"They [regulators] mapped out an enforcement action they were in no way, shape or form prepared to implement," says a person involved with the original reviews.

Four banks have not yet signed the settlement agreement unveiled today, reflecting dissatisfaction by the smaller banks with both the procedures and result of the settlement talks. Representatives of smaller banks and others familiar with the negotiations say that the settlement was pushed by the largest banks, with smaller institutions only brought in toward the end of the process.

"This was engineered by the big lenders," a source familiar with the settlement negotiation process told American Banker.

Many of the smaller banks consider the settlement ill-advised and based on shaky legal ground, but they also fear it will force their hands to go along. "No one wants to be the only bank that holds out and fights," the source added.

Reaction from consumer advocates and members of Congress is likely to be mixed. The decision by the OCC and the Fed to drop individual reviews has been panned by borrower advocates.

"They've kind of admitted defeat here," Deborah Goldberg of the National Fair Housing Alliance said in an interview on Friday.

But the perception that the previous review process failed has led some to conclude that a quick-and-dirty resolution is preferable.

"A very long time has already passed, millions of people have been hurt and gotten no relief, and this was a waste of time and money," says Kathleen Day, spokeswoman for the Center for Responsible Lending. "Whether what will replace it will be better, we have to wait and see."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.