Federal regulators on Monday reached an $8.5 billion settlement with 10 major lenders to resolve claims of foreclosure abuses, including the use of flawed paperwork and bungled loan modifications that may have led to wrongful evictions.
The settlement, which includes the nation's largest lenders, like Bank of America, JPMorgan Chase, Wells Fargo and Citigroup, concludes weeks of negotiations between the banks and the federal regulators, led by the Office of the Comptroller of the Currency. It is intended to end a troubled foreclosure review of millions of loan files that was mandated by the banking regulators. Among the problems that came to light in the last several years were sloppy record-keeping and so-called robo-signing, in which foreclosures were made based on forged or unreviewed documents.
Notably, four banks - Ally Financial, HSBC, OneWest Bank and Everbank - originally part of the negotiations, didn't sign onto the deal.
Under the settlement, $ 3.3 billion in cash relief will go to borrowers who went through foreclosure in 2009 and 2010. The remaining $5.2 billion will be directed to homeowners in danger of losing their homes and will be used to reduce the amount of principal owed or the monthly payments, for example. Payments under the settlement, which covers 3.8 million households, could be as much as $125,000.
Regulators said that borrowers would be contacted regarding relief by March 31.
The pact, which was negotiated over the weekend, almost collapsed after officials from the Federal Reserve demanded that the banks pay an additional $300 million to address their part in the 2008 financial crisis, according to several people briefed on the negotiations who spoke on condition of anonymity.
In the end, the Federal Reserve agreed to back down after the banks threatened to torpedo the deal altogether. By signing on to the settlement, the 10 banks can resolve the outstanding chapter in their wrang ling with federal banking regulators over foreclosure-related abuses.
In February, five major mortgage servicers, all included in Monday's settlement, agreed to pay $26 billion under a separate deal with 49 state attorneys general, the Justice Department and the Department of Housing and Urban Development after allegations arose in 2010 that bank employees were hastily plowing through documents used in foreclosure proceedings without properly reviewing them for accuracy.
The latest foreclosure settlement was driven, to a large extent, by banking regulators, who decided that a mandatory review of loan files was inefficient, costly and simply not yielding relief for homeowners, the people briefed on the matter said.
The goal in scuttling the reviews, which were mandated as part of a consent order in April 2011, was to provide more immediate relief to homeowners.
The comptroller's office and the Federal Reserve said on Monday that the settlement “provi des the greatest benefit to consumers subject to unsafe and unsound mortgage servicing and foreclosure practices during the relevant period in a more timely manner than would have occurred under the review process.â€
Still, some housing advocates argued that while the settlement would supplant the flawed reviews, it did not go far enough in addressing the harm suffered by homeowners. “If the reviews had been done right the first time, banks would have been on the hook to pay far more to homeowners,†said Alys Cohen, staff attorney for the National Consumer Law Center.
Concerns about the effectiveness of the review process, known as the Independent Foreclosure Review, began to mount in December within the upper echelons of the comptroller's office, according to the people with knowledge of the matter. Under the terms of the 2011 consent order, 14 banks had to hire independent consultants to analyze millions of loan records to spot any instances in which the b anks might have improperly charged fees, denied loan modifications or wrongfully seized homes from borrowers current on their payments or making reduced monthly payments.
Adding to the alarm, these people said, was that the reviews were taking more than 20 hours for every file, at a cost of up to $250 an hour. Since the start of the review, the banks have spent an estimated $1.5 billion to re-examine their foreclosure paperwork. Yet despite the huge bill, the reviews were not providing any relief to borrowers or turning up meaningful instances where homes of borrowers current on their payments were seized, according to these people.
In a series of private meetings that began last month, regulators approached top bank executives to discuss the reviews. At those meetings, officials from the comptroller's office admitted the reviews were problematic and that the agency had “miscalculated†just how much energy and resources would be required to complete the revie ws, according to the people with knowledge of the negotiations.
Even though the officials acknowledged the flawed nature of the reviews, these people said, they used the loan reviews to propel a settlement with the banks. The threat, according to the people with knowledge of the negotiations, was that banks that did not sign onto the settlement would be forced to keep poring through loan files until the reviews naturally concluded.
A majority of the banks, looking to move beyond the cumbersome reviews, agreed to the settlement.
As talks heated up in the last week, regulators sent out e-mails to the consulting firms presiding over the reviews, according to two people with knowledge of the correspondence. The e-mails alerted the firms to begin dismantling the reviews.
So far, roughly 495,000 people have submitted claims for their loan files to be reviewed, far fewer than the 3.8 million loans covered under the review. The relief will be distributed to h omeowners even if they did not file a claim for their loan files to be reviewed.
