Legal Industry News

April 9, 2012

Record $25 Billion National Mortgage Servicing Settlement Finalized by Court Order

The record $25 billion dollar national mortgage servicing settlement over alleged widespread mortgage fraud, negotiated by Washington State Attorney General Rob McKenna along with 48 state attorneys general and the federal government, has been finalized by court order.

Last Thursday, the U.S. District Court for the District of Columbia ordered the nation’s five largest mortgage servicers to comply with comprehensive new mortgage loan servicing standards, provide substantial direct consumer relief and monetary payments, and submit to an independent monitor.

U.S. District Court Judge Rosemary M. Collyer approved the court orders against Bank of America Corporation, JPMorgan Chase & Co., Wells Fargo & Company, Citigroup Inc., and Ally Financial Inc. (formerly GMAC). The orders follow the joint complaint filed in March by the U.S. Departments of Justice and Housing and Urban Development, along with attorneys general from 49 states, including Washington, and the District of Columbia.

The complaint, based on a joint federal-state investigation, alleged that the servicers’ misconduct “resulted in the issuance of improper mortgages, premature and unauthorized foreclosures, violation of service members’ and other homeowners’ rights and protections, the use of false and deceptive affidavits and other documents, and the waste and abuse of taxpayer funds.”

“In other words,” McKenna said, “their shoddy loan servicing, illegal robo-signing and faulty foreclosure processing victimized taxpayers and struggling homeowners all across the country, including tens of thousands here in Washington.”

National Settlement: $25 billion

Servicers must provide a minimum of $20 billion in benefits directly to borrowers through a series of national homeowner relief effort options, including principal reduction.  Servicers will likely provide up to an estimated $32 billion in direct homeowner relief through a complex system of settlement credits. Servicers also fund an underwater mortgage refinancing program for current, but underwater borrowers.

Under an enhanced agreement with Bank of America, the company will write down principal on a large number of underwater homeowners to market value, which is in addition to its existing principal reduction obligations under the settlement.

Servicers pay $5 billion to the states and federal government ($4.25 billion to the states and $750 million to the federal government).

Homeowners receive comprehensive new protections from new mortgage loan servicing and foreclosure standards (see below).  Servicers will implement the new standards in phases over the next six months.

Service members receive new protections that go beyond the Servicemembers Civil Relief Act (SCRA).

An independent monitor will ensure mortgage servicer compliance (see below).

States preserve the right to pursue all criminal prosecutions and many civil claims, including claims regarding the packaging of mortgage loans into securities.

Borrowers and mortgage investors can pursue individual, institutional or class action cases without restriction.

New Mortgage Servicing Standards

The five mortgage servicers will implement extensive new servicing standards, which take effect in three phases over the next two to six months:

- Stop many past foreclosure abuses, such as robo-signing, improper documentation and lost paperwork through new mortgage servicing standards.

- Require strict oversight of foreclosure processing, including of third-party vendors.

- Impose new standards to ensure the accuracy of information provided in federal bankruptcy court, including pre-filing reviews of certain documents.

- Make foreclosure a last resort, by requiring servicers to evaluate homeowners for other loan mitigation options first.

- Restrict banks from foreclosing while the homeowner is being considered for a loan modification.

- Set procedures and timelines for reviewing loan modification applications, and give homeowners the right to appeal denials.

- Create a single point of contact for borrowers seeking information about their loans and adequate staff to handle calls.

National Monitor Begins Work

Independent settlement monitor Joseph A. Smith, Jr. will oversee the terms of the finalized agreement and will help ensure compliance. A monitoring committee comprised of state attorneys general, the U.S. Department of Justice, and the U.S. Department of Housing and Urban Development will oversee the monitor, who will prepare quarterly compliance reviews.

The U.S. Department of Justice and state attorneys general can enforce through the court process compliance with the servicing standards and the banks’ financial obligations.  A federal judge may assess civil penalties for violations of the consent judgments.

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