As state and federal regulators hail the record $25 billion settlement reached this month with the nation's five biggest banks to clean up the mortgage industry, a deeper concern for the financial services industry is the host of new compliance burdens that are sure to follow.

The settlement, announced by the Justice Department on Feb. 9, resolves allegations of abusive foreclosure practices by Bank of America, JPMorgan Chase, Citigroup, Wells Fargo, and Ally Financial. But the ramifications of the agreement extend far beyond the banks that entered into the agreement.

“I think it's pretty clear that this agreement is going to ultimately emerge as the de facto standard against which all servicers are going to be held to,” says Robert Bostrom, partner and leader of the global financial institutions and funds sector team for law firm SNR Denton.

The agreement has not officially been released yet, but a confidential draft settlement dated Jan. 19, as well as other summaries of the settlement issued by the Justice Department and state attorneys general, provide an idea of compliance changes to come for players in the home-mortgage industry. (The final agreement will be made public once it's filed in the U.S. District Court in Washington, D.C., which is expected to occur over the next few weeks.)

One of the most daunting parts of the agreement sets forth strict new mortgage servicing standards, including third-party oversight of foreclosure processes. Under the draft agreement, for example, mortgage servicers are required to review personally all foreclosure affidavits, sworn statements, or any declaration filed on behalf of the mortgage service provider to ensure they are accurate, complete, and supported by competent and reliable evidence. That alone means more people, more standards, and more training to make sure bank staff follow those standards.

Banks will have to start being “much more diligent in things like affidavits and other documents related to foreclosure proceedings,” says Gene Collett, assistant director at ICS Risk Advisors, a consulting firm that works in banking compliance. For example, banks need to maintain an accurate audit trail of customers' account history, including when notices of delinquency were sent, when penalties and fees were imposed, and how much the customer owes in late payments and penalties. “You don't want to put anything in the document that can't be backed up,” he says.  

In addition, third parties—foreclosure firms, trustees, and other agents—must also confirm that they have personally reviewed and have knowledge of the accuracy and the completeness of any foreclosure affidavits, sworn statements, or declarations filed on behalf of the mortgage service provider. Third parties must also have competent and reliable evidence to substantiate a borrower's default and right to foreclose, including the borrower's loan status and require loan ownership information.

In the past, individuals who signed foreclosure affidavits often neglected to check them for accuracy or didn't have the level of knowledge they were attesting to. The purpose of these new compliance measures is to prevent foreclosure abuses of the past, such as robo-signing, improper documentation and lost paperwork, enforcement officials said. In other words, “Very little of this is able to be dealt with through automation,” Bostrom says. “The whole point of this is to require human contact.”

“I think it's pretty clear that this agreement is going to ultimately emerge as the de facto standard against which all servicers are going to be held to.”

—Robert Bostrom,


SNR Denton

Collett's advice: If your bank is using an outside party to manage foreclosures, aggressively monitor the status of each foreclosure case, rather than wait for loan officers or other third parties to send the documents.  “There must be a more active communication model with foreclosure attorneys,” he says.

Collett also recommends that mortgage servicers conduct a self-assessment of their foreclosure activity on an annual basis. Small financial institutions that have only a few dozen foreclosures each year may be able to track these using spreadsheets. Large institutions, on the other hand, will need status reports to track what accounts are in which phase, he says.

The agreement also will require that mortgage servicers confirm they've reviewed competent and reliable evidence to substantiate the borrower's default and the right to foreclose, including the borrower's loan status and loan information before referring a loan to non-judicial disclosure.

Service providers must also provide enhanced billing dispute rights for borrowers. The new servicing standards make foreclosure a last resort, by requiring servicers to evaluate homeowners for other loss mitigation options first.  In addition, banks will be restricted from foreclosing while the homeowner is being considered for a loan modification. 


Below is an excerpt from the Justice Department announcement of the $25 billion agreement with the five largest mortgage servicers to address foreclosure abuses:

U.S. Attorney General Eric Holder, Department of Housing and Urban Development (HUD) Secretary Shaun Donovan, Iowa Attorney General Tom Miller and Colorado Attorney General John W. Suthers announced today that the federal government and 49 state attorneys general have reached a landmark $25 billion agreement with the nation's five largest mortgage servicers to address mortgage loan servicing and foreclosure abuses. The agreement provides substantial financial relief to homeowners and establishes significant new homeowner protections for the future …

… The joint federal-state agreement requires servicers to implement comprehensive new mortgage loan servicing standards and to commit $25 billion to resolve violations of state and federal law. These violations include servicers' use of “robo-signed” affidavits in foreclosure proceedings; deceptive practices in the offering of loan modifications; failures to offer non-foreclosure alternatives before foreclosing on borrowers with federally insured mortgages; and filing improper documentation in federal bankruptcy court.

Under the terms of the agreement, the servicers are required to collectively dedicate $20 billion toward various forms of financial relief to borrowers. At least $10 billion will go toward reducing the principal on loans for borrowers who, as of the date of the settlement, are either delinquent or at imminent risk of default and owe more on their mortgages than their homes are worth. At least $3 billion will go toward refinancing loans for borrowers who are current on their mortgages but who owe more on their mortgage than their homes are worth. Borrowers who meet basic criteria will be eligible for the refinancing, which will reduce interest rates for borrowers who are currently paying much higher rates or whose adjustable rate mortgages are due to soon rise to much higher rates. Up to $7 billion will go towards other forms of relief, including forbearance of principal for unemployed borrowers, anti-blight programs, short sales and transitional assistance, benefits for service members who are forced to sell their home at a loss as a result of a Permanent Change in Station order, and other programs. Because servicers will receive only partial credit for every dollar spent on some of the required activities, the settlement will provide direct benefits to borrowers in excess of $20 billion.

Mortgage servicers are required to fulfill these obligations within three years. To encourage servicers to provide relief quickly, there are incentives for relief provided within the first 12 months. Servicers must reach 75 percent of their targets within the first two years. Servicers that miss settlement targets and deadlines will be required to pay substantial additional cash amounts.

In addition to the $20 billion in financial relief for borrowers, the agreement requires the servicers to pay $5 billion in cash to the federal and state governments. $1.5 billion of this payment will be used to establish a Borrower Payment Fund to provide cash payments to borrowers whose homes were sold or taken in foreclosure between Jan. 1, 2008 and Dec. 31, 2011, and who meet other criteria. This program is separate from the restitution program currently being administered by federal banking regulators to compensate those who suffered direct financial harm as a result of wrongful servicer conduct. Borrowers will not release any claims in exchange for a payment. The remaining $3.5 billion of the $5 billion payment will go to state and federal governments to be used to repay public funds lost as a result of servicer misconduct and to fund housing counselors, legal aid and other similar public programs determined by the state attorneys general.

The $5 billion includes a $1 billion resolution of a separate investigation into fraudulent and wrongful conduct by Bank of America and various Countrywide entities related to the origination and underwriting of Federal Housing Administration (FHA)-insured mortgage loans, and systematic inflation of appraisal values concerning these loans, from Jan. 1, 2003 through April 30, 2009. Payment of $500 million of this $1 billion will be deferred to partially fund a loan modification program for Countrywide borrowers throughout the nation who are underwater on their mortgages. This investigation was conducted by the U.S. Attorney's Office for the Eastern District of New York, with the Civil Division's Commercial Litigation Branch of the Department of Justice, HUD and HUD-OIG. The settlement also resolves an investigation by the Eastern District of New York, the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) and the Federal Housing Finance Agency-Office of the Inspector General (FHFA-OIG) into allegations that Bank of America defrauded the Home Affordable Modification Program.

The joint federal-state agreement requires the mortgage servicers to implement unprecedented changes in how they service mortgage loans, handle foreclosures, and ensure the accuracy of information provided in federal bankruptcy court. The agreement requires new servicing standards which will prevent foreclosure abuses of the past, such as robo-signing, improper documentation and lost paperwork, and create dozens of new consumer protections. The new standards provide for strict oversight of foreclosure processing, including third-party vendors, and new requirements to undertake pre-filing reviews of certain documents filed in bankruptcy court ...

Source: Justice Department.

All that means much more risk management and compliance across the “extended enterprise” of the mortgage servicer, the law firms it might use to pursue cases, call centers it might employ to handle homeowners' questions, and any other third parties involved in handling the mortgage of a delinquent homeowner. A compliance failure in any part of that chain can come back to haunt the mortgage bank.

“If servicers and originators don't voluntarily comply with the terms of the settlement, you're going to be the subject of similar enforcement actions and similar agreements,” Bostrom says. “All banks need to be receptive to this and think about changing their servicing practices, to be as compliant with the terms of the settlement as they possibly can be.”

On top of having to make these modifications, the banks will be overseen by an independent compliance monitor, charged with issuing periodic reports to the state attorneys general about any potential violations. Appointed to that role is Joseph Smith, who has served as the North Carolina commissioner of banks since 2002. In the event of a violation, service providers can face penalties up to $1 million per violation or up to $5 million for certain repeat violations.

The agreement also requires the banks to commit more than $20 billion toward financial relief for consumers, as well as additional payments and protections to certain military personnel. These targets must be fulfilled within three years.

Spokesmen for the banks either declined to comment or did not respond to requests for comment. In a prepared statement, Mike Heid, president of Wells Fargo Home Mortgage stated that Wells Fargo already has made “significant investments in our systems and staffing and are fully committed to implementing the standards as defined.”

More to Come

“The agreement is probably as noteworthy for what it does as for what it doesn't do,” says Bostrom. It does not, for example, prevent state and federal authorities from pursuing criminal enforcement actions, or wrongful securitization conduct under the new Residential Mortgage-Backed Securities Working Group announced by the Obama Administration in January.  Nor does the agreement prevent actions by individual borrowers and state attorneys general.

Given the amount of attention around this issue, the mortgage industry will continue to see the inside of courtrooms for years, thanks to enforcement by regulators and lawsuits from private litigants, Bostrom says. “This really is just the tip of the iceberg,” he says.

It is believed that discussions already are underway with banks that entered into consent orders with banking regulators last year over similar allegations, including U.S. Bancorp and PNC Financial Services Group. In a Jan. 18 fourth-quarter earnings call, U.S. Bancorp Chief Financial Officer Andrew Cecere said his bank had “booked $130 million expense accrual related to mortgage servicing and foreclosure-related matters.”

Similarly, PNC also said in a call with investors that it had accrued $240 million of expenses “related to residential mortgage foreclosure-related activities, primarily as a result of ongoing governmental matters.” CEO James Rohr would not elaborate more, other than to say that PNC has “talked to a number of regulators and, most recently, we've been contacted by additional regulators who gave us some information that we believe that we needed to accrue for in the fourth quarter.”

Other potential targets include HSBC Holdings MetLife, SunTrust Bank, OneWest Bank, Sovereign Bank, and Aurora Bank.