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National Mortgage Settlement Expires In 2015, Banks Battling To Keep Reforms From Becoming Permanent

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California Attorney General Kamala Harris
California Attorney General Kamala Harris

The promises made by five of the nation's largest banks under the much-ballyhooed $25 billion mortgage settlement have a surprisingly short shelf life.

Under the deal struck in February, Bank of America, Wells Fargo, Citigroup, JPMorgan Chase and Ally Financial pledged to stop the illegal practices that sparked false documentation and "robo-signing," which helped push many homeowners into foreclosure and caused endless headaches for millions of other borrowers.

But the legal agreements among the banks, and the states and federal government hold for only three-and-a-half years; the pledge runs out in 2015. Now many of these banks are battling California Attorney General Kamala Harris over her push to make permanent some of the settlement's most important "servicing standard" reforms by writing them into state law.

"The success of the national mortgage settlement in terms of reforms is laudable, but it only lasts for three years," Harris said. "We need to make the fixes permanent."

Banks do not seem to agree. The California Bankers Association, along with four of the five banks that settled the abuse investigation by federal and state governments in March -- Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo -- spent about $500,000 on lobbying efforts in California during the first three months of 2012, according to state disclosure records. It is not possible to tell from disclosure forms how much of that money was spent to influence the pending mortgage legislation, but state officials who support the legislation said lobbyists for all the settling banks except for Ally, which is much smaller than the rest, have spoken out against the proposed laws.

The California legislation is known as the "Homeowner Bill of Rights." If enacted, all banks and servicers in the state -- not just the biggest -- would be required to adopt the settlement reforms. One measure, for example, would restrict "dual-tracking," in which banks pursue foreclosure proceedings against homeowners who are pursuing a trial loan modification at the same time. Another would require financial institutions to establish a single point of contact for troubled borrowers -- a response to widespread complaints from homeowners that when they called for help, they never could speak to the same person twice.

The mortgage settlement includes similar restrictions on dual tracking, and also requires banks match homeowners with a single employee who will address their concerns.

Wells Fargo and JPMorgan Chase did not respond to requests for comment. Bank of America and Citigroup referred questions to the bankers association, which also did not respond to a request for comment. The California Chamber of Commerce, which also opposes the legislation and spent $662,000 during the quarter on lobbying efforts, also did not respond.

A press release from the bankers association said it supported some parts of the legislation, including a provision that would impose a fine of $1,000 a day on owners who fail to maintain foreclosed properties. But the group opposes other proposed reforms that are part of the package. One particular sticking point appears to be a measure that would permit borrowers to file a court action to stop a foreclosure if, for example, they had been approved for a loan modification or a short sale. The measures, taken collectively, "would all result in a de facto moratorium on foreclosures," the association wrote.

The California Chamber of Commerce included the part of the legislation that would give homeowners greater rights to challenge a foreclosure on its "2012 Job Killer Bill List." The proposed bill "delays the recovery of California's mortgage market by allowing all borrowers, including strategic defaulters and investors, to abuse the loan modification process to forestall legitimate foreclosures," the group wrote.

Harris said these arguments don't make much sense to her. "We are tweaking rules to make them more fair for homeowners," she said.

It's not clear, exactly, how settlement negotiators chose three-and-a-half years as an appropriate expiration date for the deal. Talks lasted 16 months and were exceedingly difficult, with tension not just between bank and government negotiators, but also among the 49 states that ultimately signed it.

Global multi-state deals involving a big swath of a major industry are very rare, so there aren't many historical comparisons. Measured against the national tobacco settlement, however, the time frame seems pretty short. Under that agreement, signed in 1998, the cigarette companies promised to restrict advertising, promotion and marketing of tobacco products in perpetuity.

Patrick Madigan, an Iowa assistant attorney general who was instrumental in crafting the settlement, said he didn't recall the specifics of the deliberations, but that the duration is enough time to allow federal regulators to craft national servicing standards that will apply to all servicers, not just the banks that entered the settlement.

The Consumer Financial Protection Bureau plans to propose rules this summer that will protect mortgage borrowers "from being hit by costly surprises or getting the runaround from their mortgage servicer." The agency will finalize those rules in January, it said. Presumptive Republican presidential nominee Mitt Romney has said if elected he would try to dismantle the Dodd-Frank Act that created the agency, though that effort would likely face long odds in the U.S. Senate.

Madigan also said that banks are unlikely to toss aside many of the expensive reforms they pledged to make, since many include setting up new processes to better communicate with borrowers.

"The amount of resources that they will have to commit to make these changes is extremely significant," he said. "There are hundreds of specific measures. It's not the case that they will make all these changes and then throw them in the garbage can three years from now."

Katherine Porter, a University of California-Irvine law professor who has written extensively about servicing abuses and who Harris recently tapped to monitor compliance of the national settlement on behalf of her state, agreed that banks probably won't toss aside all the reforms.

Still, she understands Harris' push. "It is appropriate that she not wait around to see what the CFPB does based on the severity of the crisis on the ground in California," Porter said.

A Department of Housing and Urban Development spokesperson said the settlement policies were meant to form new guidelines for the industry. "The servicing standards were established with the recognition that the system changes, portal development and staffing changes required by the settlement will help form the basis of new industry practices that will become a part of the standard servicing infrastructure well past the three years of settlement monitoring," said Derrick Plummer in a statement.

The hearing on the proposed California legislation is planned for May 10 and 11, in Sacramento. Legislative leaders in the state have taken the unusual step of skipping banking committees in the state Senate and Assembly, and proceeding directly to a two-house conference committee to limit efforts to kill the bills.

"I think that the legislators will do the right thing," Harris said. "These are practical commonsense solutions, which is why the banks agreed to them as part of the national settlement. Let's not be sidetracked by false choices. The false choice is that fixing a few problems amounts to overregulation of the banking industry."

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