$25 Billion Agreement Reached on Mortgage Fraud

February 23, 2012
By Brady & Associates on February 23, 2012 12:53 PM |

High-level cooperation and coordination among several government enforcement agencies paved the way toward an unprecedented joint federal-state settlement related to abusive practices by mortgage servicers. A $25 billion agreement with Bank of America Corporation, JPMorgan Chase & Co., Wells Fargo & Company, Citigroup Inc. and Ally Financial Inc. was reached by the federal government and 49 state attorneys general to address mortgage loan servicing and foreclosure abuses. Not only does this agreement provide relief to America's homeowners, it also provides for future protections for new homeowners.

Attorney General Eric Holder stated, "It holds mortgage servicers accountable for abusive practices and requires them to commit more than $20 billion towards financial relief for consumers. As a result, struggling homeowners throughout the country will benefit from reduced principals and refinancing of their loans. The agreement also requires substantial changes in how servicers do business, which will help to ensure the abuses of the past are not repeated."

Colorado Attorney General Suthers also commented, "This settlement has broad bipartisan support from the states because the attorneys general realize that the partnership with the federal agencies made it possible to achieve favorable terms and conditions that would have been difficult for the states or the federal government to achieve on their own."

New standards for mortgage loan servicing requirements and a $25 billion commitment to cover federal and state law violations are the basis of the joint federal-state agreement. The types of violations by mortgage loan servicers 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."

It is important to note that, while this agreement resolves violations by mortgage loan servicers, it does not limit the pursuit of criminal action, such as illegal securitization activities, by federal and state agencies. Additionally, the agreement does not limit the United State's authority to go after losses incurred due to a bank's faulty due diligence on government-sponsored loans. Finally, individual borrowers are still free to pursue lawsuits on their own behalf.

As part of the global settlement, Loretta E. Lynch, US Attorney for the Eastern District of New York, announced that government claims against the Bank of America, Countrywide Financial Corporation and subsidiaries will be resolved with a settlement of $1 billion to be paid to the United States for mortgage origination and underwriting fraud. The investigation resulted in findings that the FHA insurance fund was defrauded by the bank and Countrywide through a practice of originating mortgage loans for real estate with inflated appraisals and making loans to unqualified borrowers. This particular settlement was achieved largely with remedies available under the False Claims Act. Findings indicate that the underwriting and origination practices were systematic, resulting in hundreds of millions of dollars in damages to the Federal Housing Authority (FHA) insurance fund.

"It is fundamental that lending institutions that earn the authority to directly endorse FHA-insured mortgages apply our standards," said HUD Secretary Donovan. "This is the largest false claims act settlement related to mortgage fraud and will not only compensate FHA but will also ensure assistance for homeowners who have been harmed by Countrywide."

The interagency Financial Fraud Enforcement Task Force, established by President Barack Obama, was paramount in attaining this landmark joint federal-state agreement. His task force, which includes a cross section of federal agencies, regulators, and inspectors general, as well as state and local law enforcement officials, is a proactive initiative utilizing the best and most powerful range of enforcement resources.

On January 27, 2012, Attorney General Eric Holder announced the development and implementation of the new Residential Mortgage-Backed Securities Working Group, which will operate as part of Obama's Financial Fraud Enforcement Task Force. This new group will concentrate on efforts to pursue illegal activities related to residential mortgage-backed securities, including packaging, marketing and valuation.

Sources:

Federal Government and State Attorneys General Reach $25 Billion Agreement with Five Largest Mortgage Servicers to Address Mortgage Loan Servicing and Foreclosure Abuses, The U.S. Department of Justice, Office of Public Affairs, February 9, 2012

$1 Billion to be Paid by The Bank of America to The United States, Largest False Claims Act Settlement Relating to Mortage Fraud, United States Attorney's Office, Eastern District of New York, Robert Nardoza, Public Affairs Officer, February 9, 2012

Attorney General Holder Speaks at the Announcement of the Financial Fraud Enforcement Task Force's New Residential Mortgage-Backed Securities Working Group, The U.S. Department of Justice, January 27, 2012