United States: Too Little, Too Late?

The mortgage relief pact is a model for transparency. But some say consumers didn't get enough help.

For the first time in history, government prosecutors got to play Robin Hood. They took billions of dollars from the banks, and they gave it—at least much of it— to needy consumers in the form of mortgage relief. So when monitor Joseph Smith Jr. submitted his final report on the landmark National Mortgage Settlement (NMS) in March, he signed off on what might be the riskiest, most unusual and even revolutionary government deal ever undertaken.

It was a redistribution of wealth by government fiat. Court documents in the 2012 settlement contained a statement of facts that accused five major banks of committing mortgage abuses in their loan servicing and foreclosures just before, during and after the 2008 financial crisis, when millions of residents lost their homes. But rather than just collect huge fines from the banks, the government made them commit at least $20 billion for consumer relief while demanding reforms in how mortgage loans and foreclosures were handled.

By most accounts, NMS worked well. And about a year later, the government made more such deals with banks, all slightly different but all modeled after that settlement. "I have been around the mortgage market a lot," says Smith, a former North Carolina bank commissioner and ex-general counsel of Centura Bank Inc. (later acquired by PNC Financial Services Group Inc.). "And what the settlement accomplished was extraordinary."

One hallmark of the NMS settlement carried over to the other deals: its transparency. Smith made his monitor reports public, as have other monitors. That is a rarity in settlements with any company, let alone banks. These reports contain detailed explanations and graphics on where the consumer relief money is going and why. Smith says, "There were two things we had to do: to do competently what the judgments required, and to inform the public and do it in a way that they believed that we did it."

Still, the deals have their critics. The banks generally dislike the detailed mandates and resent having monitors watching over them. And it had to be irksome that they were forced to contribute consumer relief in at least three different mortgage-related deals with the government. But if that's the case, they are staying quiet about it. No bank would comment on the record about the settlements.

Consumer advocates have a beef too. They argue that the relief was too small and arrived years too late to help the estimated 5.9 million people who lost their homes. "Those people in 2008 to 2010 needed modifications and principal reductions and restructurings, and we failed terribly," says Ira Rheingold, executive director and general counsel of the National Association of Consumer Advocates. "As always, it's too little, too late."

But Thomas Perrelli, the monitor for a separate Citigroup Inc. settlement, sees another side. Perrelli, now a partner at Jenner & Block, helped negotiate the NMS when he was associate attorney general at the U.S. Department of Justice. "Too little, too late? Not for the people who were helped," he says. "It had an enormous impact on those lives."

The question of what would have been big enough and early enough will surely be debated into the future. Yet as some of these bank deals expire, or even as new ones are being reached, other important questions remain. Such as:

  • Exactly how much money are we talking about for consumers?
  • Where did it go, and what did it accomplish?
  • Is there a better way to handle, or even to deter, bank abuses in the future?

Click here to view the full cover story originally published in the May issue of CORPORATE COUNSEL Magazine

Originally published on April 27, 2016.

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