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U.S. banks still face severe consequences from allegations of pervasive mishandling of home foreclosures, despite reaching a relatively mild settlement with the bank regulators.
The Office of the Comptroller of the Currency, along with the Federal Reserve and Office of Thrift Supervision, announced on Wednesday consent decrees with the 14 largest mortgage servicers, including Bank of America, JPMorgan Chase, Wells Fargo and Citigroup.
The settlements call for stricter rules for handling mortgage documentation, better procedures for dealing with homeowners, internal investigations, and restitution to some homeowners if evidence shows that foreclosures were carried out in error.
The banks won in heading off, for now, more stringent and costly steps proposed by consumer groups, state attorneys general and some other federal agencies. These groups had called for big boosts in loan modifications, including principal writedowns. The bank regulators' settlements contain no requirements for additional loan modifications.
But the banks and other loan servicers are still stuck in a quicksand of adverse court rulings, investigations by individual state attorneys general, pending investigations by other federal agencies and potential criminal prosecution of bank officials, employees or the banks themselves.
These banks also face billions of dollars in claims for damages by investors in mortgage-backed securities, who allege the banks cheated them by giving them riskier mortgages than promised, and by never turning over the documents required to give the investors legal ownership of the mortgages.
The consent decrees give the banks no protection from these risks. Foreclosure experts say that the federal bank regulators have no authority to sweep those away.
April Charney, a Florida legal aid attorney who has been a leader in consumer efforts nationally to stop improper foreclosure practices, said, "There is nothing that the OCC can say that will give servicers a get-out-of-jail-free card or say that actions by states won't cost you a lot of money."
In March, the OCC and other bank regulators bolted from a joint effort by the 50 states' attorneys general and multiple federal agencies to reach a "global" settlement with the servicers on terms tougher than those favored by the OCC.
The banks had complained that requirements for large numbers of loan modifications would lead to abuse and prove too costly. Consumer groups, such as the California Reinvestment Coalition, contend that the settlements by the OCC, OTS and Fed do little to help homeowners. The settlements also did not require the banks to admit wrongdoing.
Kevin Stein, associate director of the California coalition, said, "The banking regulators to put it mildly have not shown themselves interested or willing to do the right thing."
OCC spokesman Robert Garsson said there had not been any intent to undercut the other regulators, or protect the banks at the expense of consumers. Referring to the banks' practices in servicing mortgages, he said, "From our perspective there's a process that's broken and needs to be fixed. Our enforcement orders will accomplish that."
He added that the OCC's settlements will not prevent the state attorneys general and other federal regulators "from taking actions at the same time and doing whatever they want."
LIST OF OTHER THREATS PENDING
The attorneys general, U.S. Justice Department and several other federal agencies are continuing their own effort, and have been meeting with bank officials in recent weeks to discuss possible penalties and other measures. The bank regulators are considering jointly announcing penalties and other financial sanctions with the attorneys general and other federal agencies. Financial penalties were not included in the settlements announced Wednesday.
While the settlements save the banks from harsher federal regulatory requirements and a wholesale requirement to boost loan modifications, the banks so far have not extricated themselves from other costly risks from the big overhang of mortgage defaults and their handling of foreclosures:
* A rapidly increasing number of state courts and federal bankruptcy judges around the country have begun to routinely throw out foreclosure cases when the banks cannot produce authentic documents showing who owns the mortgages. The courts' actions have slowed or halted foreclosures in areas subject to those rulings. RealtyTrac, which publishes foreclosure statistics, said the court decisions were largely responsible for a 27 percent decline in foreclosures from a year earlier.
For example, in January the Massachusetts Supreme Judicial Court ruled that banks may not foreclose if they lack authentic documentation that they actually owned the mortgages at the time of foreclosure.
* Although the joint investigation by all 50 attorneys general continues, unity of the group has waned, with about a dozen states losing enthusiasm for strong joint action. But in many other states, especially those hit hardest by collapse of the housing boom, the states' top prosecutors have decided to sidestep the joint effort and take strong civil and criminal action on their own.
In reality, within their states, the attorneys general have stronger powers than federal regulators to prosecute wrongdoing involving foreclosures. Foreclosures mainly are governed by state, not federal law. And the attorneys general have authority under state law to bring both criminal and civil cases for violations such as submitting false affidavits, creating false mortgage assignments, and forging signatures.
They also can bring lawsuits in state courts demanding restitution to homeowners and new requirements—potentially stricter than those imposed by the OCC—for handling foreclosures and loan modifications. Attorneys general in Florida and New York already have investigations well under way, and have subpoenaed law firms that handle large numbers of foreclosures for the major banks.
* Federal bankruptcy courts oversee foreclosures for homeowners who are in bankruptcy. The U.S. Trustees Office, an arm of the Justice Department that oversees the integrity of the bankruptcy courts, has launched actions in bankruptcy courts around the country alleging that representatives of the banks committed fraud on the courts by knowingly submitting forged and fraudulent documents.
The U.S. Trustees office is working with local federal prosecutors in some areas, potentially leading to a series of criminal prosecutions.
Investor trusts that purchased securitized mortgages have filed large numbers of lawsuits against the banks, alleging that they never actually turned over to them the mortgages that they had bought. The suits claim that the banks never provided the documents legally required to turn over ownership. Lengthy, highly detailed contracts, known as pooling and servicing agreements, spell out specifically the documents that must be turned over and when.
Evidence from foreclosure cases has shown these documents were never turned over as required. Investors also allege that the banks had promised them high-quality mortgages, but instead substituted much riskier ones that had large numbers of defaults. The banks deny this and are contesting the lawsuits.