With much fanfare, New York Attorney General Eric Schneiderman announced on May 7 plans to sue Bank of America (BAC) and Wells Fargo (WFC) for allegedly violating their obligations under the national mortgage servicing settlement.
In doing so, Schneiderman may face an opponent more intractable than the average corporate lawyer; it's the terms of the original settlement themselves.
Bank of America's attorneys are already charging that Schneiderman and Joseph Smith, the national settlement monitor, lack legal standing to pursue claims, according to a letter the bank released to the Wall Street Journal on Friday. The crux of its argument is that under the settlement's terms, banks can only be challenged for alleged violations if they reach specific, predetermined levels.
"Your office has no right under the express terms of the National Mortgage Settlement to commence an enforcement action against Bank of America, and we respectfully request that your notice of intent to do so be publicly withdrawn," the letter from Wachtel, Lipton, Rosen & Katz partner Meyer Koplow states.
A Schneiderman spokesman sought to brush aside Bank of America's claim.
"At least Bank of America will respond to one New Yorker promptly," Damien LaVera wrote in an email, making a sarcastic reference to his boss's claim that the bank has failed to offer feedback to state residents. "We have the right to bring a suit against parties that violate the Servicing Standards and will do so."
A close look at the settlement agreement raises questions about what rights the attorney general has and whether the level of errors justifies legal action.
According to the terms, the sole remedies available through a lawsuit are "An order directing non-monetary equitable relief" and potential civil penalties escalating from $1 million to $5 million. Such financial penalties are only to be assessed, however, after servicers have failed to correct errors and are found to be in "widespread noncompliance" with one of more than 300 metrics such as whether borrowers receive a timely response to a modification request laid out in the consent orders.
As other states consider following Schneiderman's lead, the contractual limits on their rights to act may serve as a deterrent. Schneiderman's office cited 339 complaints during their press conference, and consumer groups have also raised repeated claims that services have failed to comply with the settlement.
The national mortgage settlement requires banks to correct all violations, but it also states that they are subject to financial penalties only if their mistakes reach a specific "error threshold." That threshold kicks in if 1% or more of foreclosures are wrongful and at 5% for failures to respond quickly to modification requests.
For those seeking to hold servicers to task some relief is on the way, but not for several months. The Consumer Financial Protection Bureau's mortgage servicing standards are set to take effect next January and will permit broader action involving loan modifications, loss mitigation and error correction. However, the CFPB's rules are not as specific as the performance benchmarks prescribed in the national settlement and fail to describe specifically what aid borrowers will receive.
"The bulk of the requirements under the settlement are newly created servicing standards, not law, so there is not explicit consumer protection that requires these things until the CFPB's regulations go into effect," says Larry Platt, a partner at K&L Gates LLP, who represents the major banks.
Alan White, a law professor at City University of New York Law School, notes that the national mortgage settlement thresholds were first reported by attorney Abigail Field in the wake its March 2012 creation and pose a significant barrier to anyone seeking to take action against servicers.
"We continue to tolerate a very low quality of mortgage servicing, largely resulting from the horrendous concentration of the servicing industry in the four big banks," says White, who brands the national settlement "a fiasco."
Under the terms of the consent orders banks signed, the states are largely restricted in seeking redress to court orders that force them to comply with the provisions of the settlement. If the orders are granted, the remedies can lead to an array of enforcement mechanisms dictated by the judge.
Before he gets to that point, Schneiderman would have to prove that his office has offered the banks sufficient opportunity to correct their errors and that he has standing to sue. He would also have to establish that B of A and Wells Fargo have committed so many errors that they're in violation of the threshold error rates and that some form of concrete remedy exists. Even with the settlement in hand and a long list of alleged violations, New York's attorney general has a long way to go.