The US federal government and 49 state attorneys general have reached an unprecedented $25 billion settlement agreement (the Agreement) with five of the nation's largest mortgage servicers ("the Servicers"): Bank of America Corporation, JPMorgan Chase & Co., Wells Fargo & Company Inc., Citigroup Inc. and Ally Financial Inc. (formerly GMAC). The unprecedented joint settlement agreement is the largest federal-state settlement ever obtained. Every state endorsed the Agreement except Oklahoma, whose attorney general said that he thought the deal overreached the authority of state attorneys general and unfairly rewarded homeowners who had stopped paying their mortgages.

The Agreement is the result of coordination among enforcement agencies throughout the government, including, at the federal level, the Department of Justice ("DOJ"), Department of Housing and Urban Development ("HUD") and the HUD Office of the Inspector General. State attorneys general and state banking regulators also coordinated with federal agencies to resolve the so-called robo-signing allegations and various other mortgage servicing deficiencies relating to foreclosures.

The Agreement has not yet been released publicly, so this client alert is based on summaries published by the DOJ, HUD, state attorneys general, and the National Mortgage Settlement Center.

Reforms to Servicing Standards

Under the terms of the Agreement, the Servicers agree to implement comprehensive reforms to their mortgage servicing standards, foreclosures, and to ensure the accuracy of information provided in federal bankruptcy court to correct the abuses that have harmed consumers. Steps the Servicers must take to implement these new servicing standards include:

  • Put an end to robo-signing, improper documentation and lost paperwork through new mortgage servicing standards. Information in foreclosure affidavits must be personally reviewed and based on competent evidence.
  • Require strict oversight of foreclosure processing, including third-party provider oversight.
  • Develop loss mitigation strategies, including appropriately trained staff; customer outreach and communication; and review of denials of loss mitigation relief with the right of appeal for borrowers.
  • Impose new standards to ensure the accuracy of information provided in federal bankruptcy court, including prefiling reviews of certain documents.
  • Make foreclosures a last resort, by requiring servicers to evaluate homeowners for other loan mitigation options first. Dual tracking will be restricted.
  • 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.
  • Open lines of communication and establish a single point of contact for borrowers seeking information about their loans and adequate staff to handle calls.

Under the Agreement, restrictions are also placed on Servicers' ability to charge servicing fees, including limitations on default fees, attorneys' fees, late fees, force-placed insurance, and third-party fees. Servicers are also required to take measures to deter community blight, which includes the obligation to notify the borrower that the borrower continues to have a responsibility to maintain the property. Servicers must also participate in anti-blight programs and implement policies to ensure that REO properties do not become blighted.

Compliance Monitor

Compliance will be overseen by an independent Monitor, Joseph A. Smith, Jr., who served as the North Carolina Commissioner of Banks since 2002 where he oversaw implementation of a leading foreclosure-prevention program. He has also served as Chairman of the Conference of State Bank Supervisors and was President Obama's nominee to serve as Director of the Federal Housing Finance Agency. The Monitor will oversee implementation of the servicing standards required under the settlement Agreement. The Monitor also has the authority to impose penalties of up to $1 million per violation, or up to $5 million for certain repeat violations. The Monitor is tasked with publishing reports that will identify any quarter in which a servicer fell short of the standards imposed in the settlement Agreement. The settlement will be filed as a Consent Judgment in the United States District Court for the District of Columbia and remain in effect for three-and-a-half years.

Claims Foreclosed and Criminal Penalties

The settlement Agreement resolves certain violations of civil law based on mortgage loan servicing activities. However, the Agreement does not prevent federal and state attorneys general from pursuing criminal enforcement actions related to mortgage servicer conduct. Federal authorities may also pursue actions against the banks related to misrepresentations of the quality of loans that were packaged into mortgage-backed securities or from punishing wrongful securitization conduct that will be the focus of the new Residential Mortgage-Backed Securities Working Group. The United States also retains its full authority to recover any losses and impose any penalties caused to the federal government when a bank failed to satisfy underwriting standards on a government-insured or government-guaranteed-loan.

The settlement also preserves the right for third parties and individuals to bring any claims and defenses against the Servicers. The settlement also preserves certain claims against the Mortgage Electronic Registration System ("MERS"), including any claims related to securitization activities and the New York Attorney General lawsuit against MERS. The Agreement does not bar potential fair lending claims, tax claims and any claims for lost local recording fees. The settlement also does not release any claims by a state that chooses not to sign onto the Agreement—in this case Oklahoma was the only non-signatory to the Agreement.

Banking Agencies' Enforcement Actions

In addition to the provisions of the Agreement that the Servicers are subject to, the Federal Reserve Board also brought an enforcement action against the Servicers and certain of their mortgage servicing subsidiaries. As a part of this enforcement action, the Board will assess monetary sanctions against the parent holding companies of the Servicers for a total of $766.5 million due to unsafe and unsound processes and practices in residential mortgage loans servicing and foreclosure processing. The Board will also assess monetary sanctions against GMAC Mortgage, LLC a subsidiary of Ally Financial, Inc., and EMC Mortgage Corporation, a subsidiary of JPMorgan Chase & Co. The Servicers and their subsidiaries must submit plans acceptable to the Federal Reserve to correct the many deficiencies in residential mortgage loan servicing and foreclosure processing as part of the enforcement action.

In coordination with the Board, the Office of the Comptroller of the Currency ("OCC") also announced agreements with Bank of America, Citibank, JPMorgan Chase, and Wells Fargo to settle civil monetary penalties related to the entities' unsafe and unsound mortgage servicing and foreclosure practices. The OCC imposed penalties aggregating $394 million, however, the OCC agrees to hold in abeyance imposition of the penalties provided the servicers make the required payments and fulfill their obligations under the Agreement.

Allocation of Settlement Funds

Under the terms of the Agreement, the Servicers are required to meet their financial obligations within three years. Bank of America must contribute the largest portion of the total settlement fund, amounting to $11.82 billion; Wells Fargo, $5.35 billion; JPMorgan Chase, $5.29 billion; Citigroup, $2.21 billion; and Ally, $.31 billion.

Of the total settlement fund, $20 billion will be dedicated to various forms of relief to borrowers, including:

  • Principal reduction. $10 billion will be dedicated to reducing the principal on loans for borrowers who owe more on their mortgages than their homes are worth and are either delinquent or at imminent risk of default.
  • Refinancing. $3 billion will be allocated to a refinancing program for borrowers who are current on their mortgages but whose mortgages exceed their home's value.
  • Other relief. $7 billion will go towards other forms of relief, including forbearance of principal for unemployed borrowers, anti-blight programs, short sales and transitional assistance, and assistance to service members, among others.

The remaining $5 billion will go to state and federal governments in the form of cash payments. These payments will be allocated to:

  • Payments to foreclosed borrowers. $1.5 billion will go into a Borrower Payment Fund to provide immediate cash payments to borrowers whose homes were sold or taken in foreclosure and who meet certain criteria. There is no requirement to demonstrate any financial harm and borrowers do no have to release any private claims against the Servicers to make a claim.
  • State and federal government payments. The remaining funds will be used to repay public funds lost as a result of the servicer misconduct, fund housing counselors, legal aid, and other purposes. Funds allocated to the federal government will be directed to the FHA Capital Reserve Account, with portions going to the Veterans Housing Benefit Program Fund and to the Rural Housing Service.

Servicers are required to meet these financial obligations within three years. To encourage Servicers to provide cash contributions quickly, incentives are provided to those Servicers that contribute within the first 12 months. The Servicers are required to reach at least 75 percent of their financial targets within the first two years and will be required to pay penalties in the form of additional cash payments for missing settlement contribution targets and deadlines.

Servicemember and Veterans Relief

The settlement also contains enhanced protections for servicemembers that are designed to both protect servicemembers' rights under the law and provide them with additional benefits. These benefits go beyond those required under the Servicemembers Civil Relief Act ("SCRA").

Wrongful Foreclosures

Chase, Citi, Wells Fargo, and ResCap, Ally's mortgage servicing subsidiary, will work with the Department of Justice's ("DOJ") Civil Rights Division to conduct a full review to determine whether any servicemembers were foreclosed on in violation of the SCRA since January 1, 2006. If a violation is detected, servicers will be required to pay servicemembers a payment equal to the servicemember's lost equity, plus interest, and an additional $116,785 or an amount provided for a similar violation under the review conducted by the banking regulators, whichever is higher.

Interest Charged in Excess of 6%

Chase, Citi, Wells Fargo, and ResCap will also work with DOJ's Civil Right's Division to determine whether any servicemember was charged in excess of 6% on their mortgage from January 1, 2008 to the present, after a borrower requested to lower the interest rate, in violation of the SCRA. If a violation is found, servicers will be required to pay the servicemember an amount equal to a refund, with interest, of any amount charged in excess of 6% plus triple the amount refunded or $500, whichever is larger.

Permanent Change in Station Orders

Under the Department of Defense's Homeowners' Assistance Program ("HAP"), certain servicemembers who are forced to sell their home at a loss due to a Permanent Change in Station ("PCS") may be partially compensated for the loss in their home's value. However, only certain PCS servicemembers are eligible for these benefits. Under the settlement, all of the servicers will provide mandatory short sale agreements and deficiency waivers to those servicemembers who are currently ineligible under the HAP program. Under the new provision, when determining whether a servicemember is suffering a financial hardship with regard to a short sale or deed in lieu, the servicer must take into account whether the servicemember has been ordered to relocate to a new duty station at least 75 miles away from his or her former home. When reviewing a loan modification application, a servicer must consider whether a servicemember must relocate as part of the hardship determination.

Veterans Housing Benefit Program

$10 million will be paid into the Veterans Housing Benefit Program Fund, which guarantees loans through the Department of Veterans Affairs on favorable terms to eligible veterans. Veterans with VA-guaranteed mortgages will be eligible for relief provided through the servicers' $20 billion consumer relief obligations.

Foreclosure Protections for Servicemembers Receiving Hostile Fire/Imminent Danger Pay

The SCRA prohibits servicers from foreclosing on active duty servicemembers without first obtaining a court order, if such loans were secured when servicemembers were not on active duty. The settlement extends this protection to all servicemembers, regardless of when their mortgage debt was incurred, who received Hostile Fire / Imminent Danger Pay within nine months of the foreclosure and were stationed away from their home.

SNR Denton Observations

First, the Agreement is an important first step for the Servicers to step out of the headlines and move forward with their business. Although the Agreement is the tip of the iceberg for the ensuing avalanche of actions arising from the claims that are excluded from the settlement, it is the first step in putting aside the future contingent claims and returning to normalcy.

Second, although the Agreement offers the opportunity for the Servicers to resolve the complaints against them in a public forum, the Agreement mandates ongoing actions and compliance requirements from the Servicers for such conditions as the requirement to have a single point of contact for borrowers with which the borrowers can interact. The impact of the Monitor's examination and enforcement powers and ability to levy financial penalties for non-compliance means that the compliance process will be a continuing process for the Servicers. In addition to oversight by the Monitor, the CFPB is likely to examine the Servicers to ensure compliance with the obligations under the Agreement. Servicers could therefore be held to two separate standards of compliance--one from the Monitor, and a second from the CFPB, which is not bound by the findings of the independent Monitor. Fulfilling the numerous obligations required under the Agreement could entail considerable expense and it puts a heightened emphasis on the need for robust compliance programs.

Third, the CFPB has also stated that it intends to supervise the independent, nonbank institutions that specialize in the servicing of subprime or delinquent loans that are not part of the Agreement. With the CFPB's new authority, it can supervise both banks and nonbanks and will have the authority to look into the entire mortgage servicing market. This will have a major impact on nonbank servicers that used to receive little or no oversight.

Fourth, although the Agreement resolves certain violations of civil law based on mortgage loan servicing activities, as enumerated above, the Agreement preserves the right of individuals, third parties and government regulators to claims arising out of the misconduct of the Servicers. Outside the scope of the Agreement, there is nothing barring further enforcement action and litigation against not only the Servicers, but against other banks and mortgage originators. This highlights the importance of implementing and maintaining compliance programs.

Fifth, since the Agreement is between the nation's five largest servicers, representing approximately 55% of the total servicing market, it stands as a model for any future actions against other servicers and sets the national standard for all servicers. If mortgage originators do not voluntarily comply with the standards set forth in the Agreement, they may be the subject of similar agreements. In fact, there are reports that discussions are underway with nine other servicers.

Sixth, it is unclear at this time to what extent the settlement terms will extend to loans sold to third parties by any of the affiliates of the Servicers, in instances where a Servicer is no longer servicing the loan. There is a possibility that the purchaser's servicer (assuming it is not one of the Servicers) would be subject to compliance with the terms of the Agreement.

Seventh, due to the potential for further investigations and enforcement actions, mortgage servicers should immediately conduct a third party assessment and compliance review and make appropriate recommendations and an action plan to comply with the new standards before the CFPB and the independent Monitor conduct any examinations to minimize the chance for enforcement actions, fines, and penalties, and any other actions by state attorneys general.

Eighth, the Agreement could have a positive impact on the housing markets by helping homeowners stay in their homes. It will likely slow down the foreclosure process significantly and there could be a corresponding increase in refinancings as a result of the Obama Administration's recently announced refinance program. There may also be continued pressure from state attorneys general for Fannie Mae and Freddie Mac principal reductions on mortgages. These factors could signal a rise in the housing markets.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.