U.S. and state officials accused five large U.S. banks of overcharging and misleading borrowers in court documents filed Monday as part of the $25 billion settlement of alleged foreclosure abuses.
The filing offered a detailed description of how the five banks allegedly violated state and federal law. Officials spent more than a year investigating foreclosure practices that began as a probe of "robo-signing," or employees approving documents without proper review.
Banks "engaged in a pattern of unfair and deceptive practices" and made "false or fraudulent" claims to the federal government, according to an eight-count complaint filed in U.S. district court for the District of Columbia.
In settling, the five banks—Ally Financial Inc., Bank of America Corp., Citigroup Inc., J.P. Morgan Chase & Co . and Wells Fargo & Co .—neither admitted nor denied guilt.
Under the agreement, the banks will provide principal relief and other borrower assistance valued at $17 billion. In addition, roughly $5 billion of the settlement will be paid in fines, while $3 billion will be used to help refinancing for homeowners who owe more than their homes are worth. The deal also includes new mortgage-servicing standards.
Former North Carolina Banking Commissioner Joseph A. Smith Jr. will serve as the monitor for the settlement, charged with ensuring that the terms of the agreement will be met over the next 3½ years. Banks will be subject to penalties of up to $1 million per violation of the order, with penalties of up to $5 million for certain repeat violations, according to the deal.
The issues laid out in the complaint go well beyond the allegations of robo-signing. Among other things, the complaint alleges that the five banks charged borrowers excessive or improper fees, failed to properly apply borrower loan payments and wrongfully denied borrowers loan modifications.
The banks also provided homeowners with "false or misleading information," failed to have appropriate staffing levels to meet the surge in troubled loans, and overcharged and improperly foreclosed on members of the military, according to the complaint.
Banks also engaged in a "continuing abuse of the bankruptcy process" and filed "false or fraudulent claims" for reimbursement from the Federal Housing Administration's mortgage insurance program, according to the court filing. The complaint singles out Countrywide Financial Corp., which was acquired by Bank of America in 2008, for faulty underwriting that has cost the Federal Housing Administration "hundreds of millions of dollars in damages."
Under a side agreement, Bank of America will offer more than 200,000 financially strapped households the chance to reduce loan balances by an average of more than $100,000. Borrowers must have been at least 60 days past due on their loan as of Jan. 31, 2012, and have a loan serviced by Bank of America that is either owned by Bank of America or one of its affiliates, or packaged into securities by Countrywide and sold to investors. The arrangement doesn't apply to loans backed by Fannie Mae, Freddie Mac or the FHA.
Separately, Ally Financial will offer deeper principal reductions than other servicers to certain borrowers whose loans the bank owns. Ally, majority-owned by the U.S. government, also promised to ensure its Residential Capital mortgage subsidiary meets its settlement obligations if it is sold or reorganized.
Wells Fargo and J.P. Morgan began on March 1 to evaluate borrowers for relief under the settlement, representatives of the banks said. An Ally spokeswoman said the bank's mortgage unit will begin "proactively reaching" out to eligible borrowers "in the coming days." Citigroup has been taking borrower calls for the program since March 1 and is "already moving a few hundred cases into the pipeline," a spokesman said.
Bank of America has begun going through its current loan modification pipeline to determine whether borrowers may be eligible for the program, a Bank of America spokesman said. It will begin soliciting borrowers under its expanded program in April and expects to complete that process within six months, he added.