Potentially $135 billion or the political demise of the CFPB.
Ahead of the first face-to-face negotiations between major banks and government agencies over a proposed mortgage servicing settlement, additional information is surfacing over the potential scope and scale of the settlement. An internal presentation by the CFPB to the 50-state Attorneys Generals estimates that mortgage servicers avoided $20 billion in servicing costs by failing to adequately process loan modifications of troubled homeowners, and suggests that a proposed settlement, in addition to or as an alternative to a regulator-imposed penalty, would focus on mandates for principal reduction and short sales for underwater homeowners.
The CFPB estimates that a regulator-proposed $20 billion penalty would have limited effect on the bank’s capital ratios, suggesting that a penalty that size would not adversely affect bank solvency. However, depending on the extent of borrower eligibility for principal reductions (i.e., how much principal is forgiven) and the number of mandated loan modifications, these mandates could cost servicers and banks anywhere between $7 billion to $135 billion. It is unclear whether the major servicer banks could absorb a settlement costing $135 billion, although some have already speculated that the true costs could go beyond these estimates.
These new figures come on the heels of the extensive coverage (see here and here) of the ongoing negotiations between the coalition of 50-State Attorneys General and major mortgage servicers, and the criticism (see here) of the CFPB and Elizabeth Warren’s involvement in the negotiations.
The new settlement negotiations are, in some part, a response to separate lawsuits filed by attorneys general from Nevada and Arizona (see the Nevada complaint here) alleging that Bank of America (BofA) failed to comply with and perform according to a 2008 mortgage servicing settlement. In particular, the suit claims that BofA’s loan modification program, among other reasons, (1) misled customers with false assurances that their homes would not be foreclosed on while request for modifications were pending/processing; (2) engaged in bait/switch tactics, with different terms of mortgage modification offers to borrowers; and (3) denied modifications based on inaccurate and deceptive grounds, such as failing to genuinely seek investor approval for loan modifications.
A number of experts have criticized the 2008 settlement as poorly structured, unenforceable, and unsound due to the inherent conflicts of interest, such as the servicer’s second-lien loan portfolio liabilities and default servicing income. BofA, for example, would lose 90 cents on the dollar for loan mods with principal reductions and would also eliminate the fee income it receives from borrowers in default. Others, such as Adam Levitin, have gone so far as to say that the bank regulators did not pursue more strict settlement terms in order to preserve bank solvency.
The 50-state AG memo sent to banks ahead of negotiations nonetheless seeks to address the 2008 settlement shortcomings in a new proposed settlement. Key terms in the new settlement may include:
· Requiring servicers to provide a single point of contact for borrowers looking to modify their loans
· Requiring servicers to develop an electronic portal to submit and track mortgage documents
· Banning foreclosure notices while modifications are pending or processing
· Establishing eligibility terms for mandated principal reductions during a loan modification
Although the CFPB’s more extensive involvement in the settlement negotiations will be “sure to anger Republicans in Congress and a banking industry intent on diminishing the fledgling CFPB’s legitimacy by questioning its authority to act before it’s officially launched in July,” it seems unlikely that the CFPB’s role will diminish given its imminent responsibilityto monitor and regulate mortgage servicers.
James Nguyen, What’s at Stake in the Ongoing Mortgage Servicing Settlement Negotiations?, Berkeley Bus. L.J. Network (March 29, 2011), http://thenetwork.berkeleylawblogs.org/2011/03/29/what%E2%80%99s-at-stake-in-the-ongoing-mortgage-servicing-settlement-negotiations/.