More than a month after federal and state officials announced a massive $25 billion settlement with the five mortgage servicers, the Justice Department on Monday finally released the actual legal document.
While some of the information was already known, the document dump provided critical new details about the terms of the agreement. The sheer number of pages — about 300 for each of the five servicers, some of the pages consisting solely of signatures from the multitude of parties involved — also underscored what a huge undertaking the agreement is.
"Simply synchronizing the differing interests of the various governmental and private parties in over a year of negotiations seemed to require a computer program," Laurence Platt, a partner with K&L Gates, wrote in a note to clients on Monday afternoon. The documents also show that "while the settlement terms are likely to contribute to the future housing recovery, the federal and state governments appear intent to continue to pursue enforcement actions for prior conduct."
Following is a summary of the highlights of the legal documents, which can be viewed here:
New Servicing Standards
The settlement documents include a broad spectrum of servicing standards agreed to by each institution under the pact. These include requirements that each servicer must:
• ensure accuracy of court documents and other records related to a borrower's foreclosure or bankruptcy;
• Set standards for training and supervising employees responsible for loan and foreclosure documentation.
• Establish process for documenting a servicer's "enforceable interest" in promissory note and mortgage.
• Complete due diligence and periodic reviews of third-party providers involved in mortgage servicing work.
• Inform borrowers of possible foreclosure alternatives before issuance of foreclosure referral, and make an offer of a modification when that would exceed the net-present value of a foreclosure.
• Follow specific timeline requirements that restrict so-called "dual tracking" of the foreclosure process while a borrower is involved in pursuing a modification.
• Appoint a "single point of contact" for troubled borrowers who, among other requirements, will make an effort to introduce themselves to their respective borrowers, explain features and requirements for loss-mitigation programs a borrower is eligible for and help borrower look for other foreclosure alternatives upon the denial of a loan modification.
• Create an online "loan portal" where "borrowers can check, at no cost, the status of their first lien loan modifications."
• Do independent evaluations of their denials of modifications.
• Maintain sufficient staffing to focus on loss mitigation and avoid compensation arrangements for employees that encourage foreclosures over other alternatives.
• Take steps to comply with servicing provisions that specifically protect borrowers who are military servicemembers.
• Comply with restrictions on the sale of force-placed insurance, including that a "servicer shall not obtain force-placed insurance unless there is a reasonable basis to believe the borrower has failed to comply with the loan contract's requirements to maintain property insurance."
• The settlement provides incentives and credits for banks based on how they treat borrowers that have been adversely affected. But banks receive more credit for principal reductions performed on loans held in their own portfolio, versus those owned by investors.
• The incentives primarily focus on borrowers with a loan-to-value ratio of less than 175%. Servicers receive a dollar-for-dollar credit for such loans. By contrast, for loans above that level, servicers only get half the credit, or 50 cents for every $1 of principal forgiven. Borrowers have to remain current on their mortgage for 90 days after receiving the modification.
• Servicers receive 45 cents of credit for every $1 of principal reduction on loans owned by investors.
• Mortgage modifications may also involve principal forbearance, in which the servicer allows a borrower to pay a reduced mortgage payment while still owning the original principal. Servicers receive 40 cents of credit for every $1 in forbearance forgiven on existing modifications.
• Servicers cannot require borrowers to waive or release legal claims as a condition for getting relief. They can, however, ask for a release for liability to resolve a contested claim, when the borrower would not otherwise have received such favorable terms.
• Servicers can receive 90 cents for every $1 principal write-down for performing second loans. For seriously delinquent second loans, they receive 50 cents of credit per $1 of write-down. For second liens that are 6 months delinquent, they receive just 10 cents of credit for every $1 of write-down.
Monitoring and Enforcement
• Joseph A. Smith, Jr., the former banking commissioner of North Carolina, is the independent monitor of the settlement agreement. Smith was given certain powers to ensure the servicers take the appropriate steps to comply with the agreement.
• A separate monitoring committee, made up of representatives from state and federal regulators, is charged with monitoring reports from the servicers.
• Servicers will conduct their own compliance reviews each quarter by designating an internal review group separate from the servicing business. The group must report to a chief risk officer, chief audit executive, chief compliance officer or "another employee or manager who has no direct operational responsibility for mortgage servicing."
• Each servicers' internal review group has to come up with a work plan within 90 days showing how they will comply with the agreement. They also have to set the methods and procedures to compute specific metrics that are to make up each quarterly report. They also have to have a methodology for reviewing the work.
• Servicers and their internal review groups are required to give Smith all executive office servicing complaints and to turn over any information if the servicer is found to have engaged in significant pattern of noncompliance, particularly those that are reasonably likely to cause harm to borrowers. Smith has the authority to interview servicer employees and third-parties if the internal review group cannot be relied on or if the group did not correctly implement the work plan in some material respect.
• Smith will issue his own reports on servicers' compliance. The so-called monitor reports will list the metrics and any error rates, whether there have been any potential violations, if they were cured and the number of borrowers who have been assisted. Servicers can submit their own written comments on the reports.
• Smith can seek remedies if a servicer failures to cure a potential violation including an order directing non-monetary relief or corrective action; civil penalties of not more than $1 million per uncured potential violation; or up to $5 million for widespread noncompliance for a second uncured potential violation.
The settlement includes releases from certain federal claims, including errors related to servicing conduct; origination; and errors specifically related to servicing loans for borrowers in bankruptcy.
The claim "fully and finally" releases the company and any affiliated entities, from any civil or administrative claims and any civil or administrative penalties — including punitive or exemplary damages—for:
• Servicing claims under the: Financial Institutions Reform, Recovery, and Enforcement Act; False Claims Act; the Racketeer Influenced and Corrupt Organizations Act; the Real Estate Settlement Procedures Act; Fair Credit Reporting Act; Fair Debt Collection Practices Act; Truth in Lending Act; Interstate Land Sales Full Disclosure Act and certain sections of the Gramm-Leach-Bliley Act.
• Origination claims under RESPA, TILA, Fair Credit Reporting Act; and Interstate Land Sales Full Disclosure Act, and certain claims made under FIRREA.
• The Consumer Financial Protection Bureau agreed to release servicers from any claims related to servicing or origination conduct that took place prior to July 21, 2011, when the bureau became an independent agency. But the agency reserved the right to obtain information related to conduct
• The agreement does not release claims related to: liability under the tax code, any individuals (such as bank officers or employees) who are the target of a criminal investigation, any criminal activity, mortgage securitization claims, liability relating to private mortgage insurance, violations of fair lending laws.
FHA Releases and Hamp Incentive Payments
• The agreement also releases claims related to servicing of FHA loans (regardless of whether a claim for mortgage insurance benefits has been submitted, or is in the future). The release does not relieve banks from the obligation to remedy defects of title or other problems that may preclude FHA from paying a claim for which it lacks statutory authority. It also does not relieve banks from their obligation to provide FHA with mortgage insurance premiums that have been or should have been collected.
• It also releases banks from any claims that they made a "false or fraudulent annual certification that the mortgagee had 'conform[ed] to all Department of Housing and Urban Development-FHA regulations necessary to maintain its HUD-FHA approval'" — meaning HUD cannot claim a servicer violated the False Claims Act by making a false annual certification.
• Under the agreement, the Treasury Department agreed to release servicer incentive payments to Bank of America and JPMorgan Chase that it had withheld for failure to comply with the Hamp program's requirements. Treasury reserved the right to "adjust" any incentive payments in the future.
Servicemembers Civil Relief Act
• Under the settlement, JPMorgan, Citigroup, Wells Fargo & Co. and Ally Financial must conduct a full review to determine whether any servicemembers were foreclosed on in violation of the Servicemembers Civil Relief Act.
• The banks will have to make minimum payments of $116,785 to any victim of a wrongful foreclosure since Jan. 2006.
• In addition to payments, servicemembers will be compensated for lost equity plus interest.
• To ensure consistency with an earlier settlement, JPMorgan Chase has also agreed to provide any victim either his home free and clear of any debt, or the cash equivalent of the full value of the home at the time of the sale, plus compensation for additional harm.
• Wells Fargo, Citi and Ally must also conduct a review to determine whether any members of the military were charged more than 6% interest on their loans after filing a valid request to lower the interest rate — a violation of SCRA. Under the terms of the deal, banks will have to refund, with interest, any amount charged in excess of the 6% — plus triple the amount refunded or $500, whichever is larger.
• Wells, Citi, Ally and JPMorgan also agreed to pay for additional SCRA training for employees and agents, develop new policies to ensure compliance and repair any negative credit reports damaged by the alleged violations.