Frustrated by the lack of progress with a global settlement between the 50 state attorneys general and the top mortgage servicers, federal banking regulators are expected to move forward with their own enforcement actions against 14 servicers as early as next week.
The cease and desist orders are expected to establish best practices for the servicing industry, including new documentation verification procedures, oversight from third parties and additional legal counsel, limitations for dual tracking foreclosures and modifications simultaneously, and a comprehensive look back to uncover prior mistakes.
The regulators' move comes as bankers offered their own counterproposal to the state AGs that echoes much of what the banking regulators are seeking. While bankers and enforcement officials had agreed a single global settlement with all state and federal agencies would be optimal, the cease-and-desist order may ultimately help the servicers by serving as a template for a final deal with the other agencies.
Some observers said it makes sense for the banking regulators to act as talks between the state AGs and the servicers have dragged on.
"The bank regulators have responsibility for the oversight of the banks and where they have gone in and determined there were weaknesses they have an obligation to address them," said Jeffrey Naimon, a partner at BuckleySandler. "While a comprehensive settlement is preferable, the bank regulators … can't just wait around. They have to do something and I think they are going to move forward."
The cease-and-desist action is not expected to include a large fine as the state AGs are seeking, but instead will order banks to offer remediations to any homeowners found harmed after they perform a comprehensive look back at their own files. Such look backs, which are common in other enforcement actions such as anti-money-laundering orders, require banks to closely examine previous cases in light of flaws uncovered by regulators in their internal procedures.
Observers were split on whether a separate move from the banking regulators would help or hurt the servicers.
"It would be better for everybody if the bank regulators, state AGs, Justice and [the U.S. Department of Housing and Urban Development] can reach closure at the same time," said Michael Barr, a professor at the University of Michigan and a former U.S. Treasury assistant secretary in the current administration. "It would be better for the banks to do that. It would be harder for the banks to put this foreclosure mess behind them if they have piecemeal approaches."
But some said a separate action benefits the servicers, which will have more leverage to push back against the state AGs. Since the AGs first issued a 27-page proposed term sheet in March, the banks have argued it went too far and did not detail what exactly they did wrong. The cease-and-desist order includes details on what regulators uncovered during their investigation of servicer practices and ways they must be fixed.
"It sets the bounds for the attorneys general," said Gil Schwartz, a partner at Schwartz & Ballen. "How are the attorneys general to say the banking agencies didn't go far enough and want more? The federal settlement seems to me establishes a ceiling that would apply to the attorney general settlement."
Cliff Rossi, a professor at the Robert H. Smith School of Business at the University of Maryland, said the longer a negotiation with the AGs drags out, the better off bankers will be.
"There could be years to wrangle over this," he said. "You have a number of constituents. … I don't think this thing is going to go away quietly any time soon. With the federal banking regulators [done], what is the incentive for the banks and the state AGs to come to the table? I would certainly wait and see how this happens and maybe we can come to an easier settlement. I would play the stall game as long as I can get by with it."
The cease-and-desist order also appears more modest in comparison to the term sheet sought by the state AGs and other federal agencies, including the Justice and Treasury departments. While the term sheet sought sweeping industrywide changes, including a push for principal reductions, the cease-and-desist orders are less broad in scope.
"This is one more aspect where the more extreme aspects of the state proposal are going to look less compelling and be what they really are — which is being overreaching," said Ellen Marshall. a partner at Manatt, Phelps & Phillips.
For their part, regulators privately say they tried to wait for the state AGs to move forward, but it is unclear when or even if a settlement could be reached. Regulators first gave the banks a 21-page draft cease-and-desist order in February, and have been waiting on the AGs ever since.
But talks between the AGs and the top five servicers are stalled. Officials with the attorneys general and Justice Department met with servicers in an all-day meeting on Wednesday, but after nearly eight hours were unable to come to any resolution. The sides agreed to keep talking, but do not appear close to a deal.
Participants in the meeting included about 50 people, including Iowa Attorney General Tom Miller, Associate U.S. Attorney General Thomas Perrelli and attorneys general from Virginia, Illinois, North Carolina, Delaware and representatives of the Treasury Department and Federal Trade Commission.
"I think we have a long way to go," Miller said following the meeting. "There are a lot of differences between us and servicers. … There is no time line. We've talked about by X date, and months not weeks, and always been proven at least somewhat wrong on that. But we're figuring out, rather shortly, what the next step is, and when we meet again, but we haven't decided that."
But Miller's office dismissed criticism that the process was taking too long.
"We're going to move forward regardless and while we hoped to be able to do this in a broadly coordinated manner, we will still pursue our efforts as attorneys general," said Geoff Greenwood, Miller's spokesman. "We started this back in October and we had to take an adequate amount of time to get a good look as to what the problems have been and needed the time to formulate our term sheet and now we need the time to negotiate our term sheet."
Before the meeting on Wednesday, servicers offered their own conditions for an agreement. In their 16-page counteroffer, the servicers agreed to several demands from the original term sheet, including time lines for responding to and acting on modification requests, the establishment of a single point of contact for troubled borrowers, the creation of a "portal" to help customers submit mod documents electronically and limitations on dual tracking. They also agreed to limit the use of force-placed insurance to certain circumstances.
But they soundly rejected the primary push from the AG proposal — principal reductions.
Speaking to reporters after a U.S. Chamber of Commerce event on Wednesday, JPMorgan Chase & Co.'s chairman and chief executive, Jamie Dimon, put it bluntly.
"Principal writedowns for people who couldn't pay their mortgages? Yeah, that's off the table," he said.
Still, some observers said the counteroffer could be as much as state AGs could win from the banks.
"It's plenty reasonable," said Stephen Ornstein, a partner at SNR Denton. "It should cover the main areas of concern and they are within the borrowers ability to effectuate the changes, within the servicers ability to make these changes without violating contracts with investors. You are talking about best practices. … It doesn't include the poison pills of the AG draft. This seems much more doable."
Marshall agreed that the counteroffer seemed significant.
"There is real meat in it, real specifics that go beyond things that the servicers have been doing all along," she said. "The terms are aspirational, too, in the sense that they call upon the servicers to follow what we might think of as 'best practices' more consistently than they may have been followed in the past."
But not everyone was impressed. Barr said the terms "don't blow me away," and characterized them as just an agreement to do what they should already be doing. " 'We promise to run our shops as if we were serious financial companies, and treat our customers as if they were our customers,' " he said.