Foreclosure Talks Snag on Bank Liability

August 23, 2011: Efforts to reach a settlement that would end the long-running probe of foreclosure practices are snagged over whether banks will get broad legal immunity from state officials for mortgage-related claims.

Federal and state officials are seeking penalties of $20 billion to $25 billion from Bank of America Corp., J.P. Morgan Chase & Co. and other financial firms under investigation since last fall. The banks are pushing hard for a deal, but they have insisted on a wide-ranging legal release from state attorneys general.

“They wanted to be released from everything, including original sin,” said a U.S. official involved in the discussions. The legal protection sought by the banks included loan origination; securitization and servicing practices; fair-lending procedures; and their use of the Mortgage Electronic Registration Systems, an industry-owned loan registry that often acts as an agent for owners of mortgage loans, people familiar with the discussions said.

“The reason the banks would settle or pay anywhere near $20 billion to $25 billion is to get this behind them,” said one person familiar with the banks’ thinking. “There’s no reason the banks would pay that amount of money and leave their flank exposed.”

U.S. and state officials dismissed the push for broad immunity as a “nonstarter,” according to a federal official involved in the talks, but they have countered with a narrower offer. It would cover robo-signing and other servicer-related conduct but leave banks open to potential legal action for wrongdoing in fair lending and securitization, according to people familiar with the situation. Attorneys general in California, Delaware, Massachusetts and New York have said they are investigating mortgage-securitization practices.

Illinois Attorney General Lisa Madigan, said in regard to a settlement with banks that ‘we are not releasing fair-lending claims.’ “Those of us at the table…have maintained this investigation is about robo-signing and loss-mitigation problems,” Illinois Attorney General Lisa Madigan said in an interview. “The release should be narrowly drafted to cover those issues.”

The debate over the release is one of the most contentious issues facing banks and government officials, who began formal settlement discussions in March, and must be resolved for a deal to proceed.

Federal officials are aiming for a settlement by Labor Day, with some insisting that making a deal soon would give the housing market a much-needed boost and avoid the risk of a protracted legal showdown with the banks. The foreclosure machine has been sputtering since the issue came to the fore last fall, though banks insist their procedures resulted in few or no wrongful foreclosures.

Federal officials say they plan to step up their outreach directly with individual attorneys general as they bridge remaining gaps between different parties and that they remain optimistic about the prospect for reaching a settlement.

Legal releases are thorny to negotiate, since parties under investigation want the broadest possible protection and government officials want to maintain their ability to pursue wrongdoing. In the foreclosure investigation, the process is unusually complicated by the large number of regulators and financial institutions involved, big money at stake and high-profile status of the case.

The banks have said the size of any settlement should be tied to the scope of the legal release and number of states signing an agreement. One tactic being weighed by the banks is to agree to a settlement acceptable to 80% of the states, sources familiar with the banks’ position said.

The scope of a release isn’t likely to be a substantial hurdle for states that aren’t pursuing their own investigations of mortgage practices. In addition, some types of legal claims could be difficult to pursue regardless of an immunity agreement because statutes of limitation might have expired, lawyers said.

Some state attorneys general are publicly resisting a broad legal release or even a narrower agreement if it would impede existing cases. “We in Illinois have made it eminently clear every time we talk about releases that we are not releasing fair-lending claims,” said Ms. Madigan.

Illinois has filed fair-lending lawsuits against Wells Fargo & Co. and Countrywide Financial Corp., acquired by Bank of America in 2008.

A Wells Fargo spokesman said the company has filed a motion to dismiss the Illinois lawsuit, and is awaiting the court’s ruling.

A Bank of America spokesman said: “We continue to believe that the best way to get the housing market going again in every state is a global settlement that addresses these issues fairly, comprehensively, and with finality.”

Nevada Attorney General Catherine Cortez Masto said she is “going to be very cautious” about any release that could affect investigations or litigation. Ms. Masto has alleged that Bank of America violated the law in its handling of troubled loans. “A broad release isn’t going to do … any good [for me] or the people of my state.”

Massachusetts Attorney General Martha Coakley recently said she won’t let banks escape potential legal liability for claims related to securitization and use of the Mortgage Electronic Registration Systems “until we know all the facts and all of the damage.” Doing otherwise “is like buying a used car without looking under the hood. There’s a good chance you will get a lemon.”

New York Attorney General Eric Schneiderman has issued subpoenas or requests for information to a range of parties involved in the mortgage machine. The attorney general “remains concerned by any settlement agreement that would preclude attorneys general from conducting comprehensive investigations of the mortgage crisis,” a spokesman for Mr. Schneiderman said.

Delaware Attorney General Beau Biden has also begun investigating securitization and other mortgage-industry practices. “We would oppose any settlement that would release claims broader than servicing conduct,” says Delaware Deputy Attorney General Ian McConnel.”That would include origination, securitization and [Mortgage Electronic Registration Systems] claims.”

Published by Stout Law Firm

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