Government officials are likely to lessen large banks' liabilities over how they handled delinquent Federal Housing Administration (FHA)-insured mortgages as part of a settlement with the largest mortgage servicers, according to people briefed on the negotiations.

The Department of Housing and Urban Development (HUD) has offered to release banks from liability relating to their loss-mitigation efforts on delinquent FHA-insured loans, the people said. The offer would apply to certain liabilities related to banks' servicing practices, but it is unclear whether the settlement would also provide relief from claims related to mortgage originations.

The current settlement proposal is the latest proffer in the long-sputtering negotiations between state attorneys general, federal officials and mortgage servicers. The talks are focused on the banks' controversial foreclosure-related practices, including so-called robo-signing of foreclosure documents. The parties to the talks are aiming to resolve their differences by Christmas, several people briefed on the talks told ASR sister publication American Banker. (AB is a sister publication to National Mortgage News.)

The government has stepped up its scrutiny of how large banks handle FHA-insured loans. It sued Deutsche Bank in May for $1.2 billion, alleging underwriting and quality-control violations. That lawsuit raised the threat of similar actions against other large banks, including Bank of America Corp., Wells Fargo, Citigroup and JPMorgan Chase, which hold billions of dollars each of delinquent FHA-insured loans.

Now federal officials are offering banks a way to limit some potential liabilities. Currently, if a bank submits a mortgage-insurance claim to the FHA and HUD finds evidence that the underlying mortgage was improperly handled the bank can, under the False Claims Act, be held liable for treble damages, or fines that amount to three times the sum of the original claim submitted by the lender.

As part of broader settlement talks over the banks' questionable mortgage practices, HUD would release banks from that liability and not seek fines from banks relating to some parts of the FHA-insured mortgages they currently hold, sources say.

That offer could save big banks billions of dollars each in potential legal settlements and fines related to claims that they failed to follow proper loss-mitigation procedures on delinquent FHA-insured mortgages, according to people briefed on the talks. The liability release may be limited to certain mortgage originations made between 2006 and 2009 and would not include a release from liability for fraud or violations of representation and warranty claims, one of the people said.

Clinton Rockwell, a partner with the BuckleySandler law firm, said a release from liability could be "a good thing" for banks — depending on the nature of the remaining settlement terms.

"Loss mitigation and treble damages issues are certainly on everyone's radar screen as a big deal," said Rockwell, whose firm represents banks. "But it all depends on the structure of a settlement. Does the fact that HUD is making this deal mean only some aspects of servicing are covered, but not underwriting? And how would that affect other branches of the federal government? It's certainly a moving target."

A HUD spokesman declined to comment on the settlement talks.

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