New York Attorney General Eric Schneiderman said Monday he may sue Wells Fargo and Bank of America for allegedly violating the terms of last year’s multi-state mortgage settlement, despite questions over his authority to do so.
The agreement, reached by the Department of Justice, Department of Housing and Urban Development and 49 state attorneys general, called for the five largest mortgage companies to significantly revamp their procedures for dealing with distressed borrowers. It called on them to provide billions of dollars in aid to those borrowers and change the way they pursue home repossessions, in exchange for prosecutors dropping legal claims that the companies systematically violated borrowers’ rights when using faulty, so-called “robosigned” documents in foreclosure proceedings.
Consumer advocates have heralded the establishment of standards for how the companies would treat borrowers who fell behind on their payments as the settlement’s signature achievement. The new mortgage servicing provisions were supposed to “address the issues that led to the creation of the settlement,” according to Joseph Smith, the settlement’s official monitor.
The five banks -- JPMorgan Chase, Wells Fargo, Bank of America, Citigroup and Ally Financial -- collectively service more than half of all outstanding U.S. home loans. Since Oct. 2, 2012, they have had to comply with 304 mortgage servicing requirements, including offering struggling borrowers the opportunity to avoid foreclosure and approving or denying loan modifications within 30 days of receiving a complete application.
Schneiderman said Monday his office has uncovered 339 alleged violations of the settlement's terms, 210 concerning Wells Fargo and 129 concerning Bank of America. He said he intends to sue the banks for “repeatedly violating” the settlement if the monitoring committee of representatives from various federal and state agencies declines to take action.
But it’s unclear whether Schneiderman could successfully bring such a lawsuit. The agreement does not specify whether he can independently pursue legal action against the banks without first allowing the Office of Mortgage Settlement Oversight, run by Smith, to determine whether they are complying, a process that could take months.
Smith's office will make public by June 30 its first required report on the banks’ compliance with the mortgage servicing standards. The deal dictates that the companies shall have an opportunity to correct potential violations once they are identified. If the same violations continue, the monitoring committee could launch lawsuits and levy penalties totaling as much as $5 million for each violation.
Regardless, Schneiderman said the agreement allows him to enforce the settlement unilaterally. He said he warned his fellow regulators of his intent to sue on Friday, though some officials in the offices of other state attorneys general said they only learned of his plans in a Monday morning email from his office.
“Wells Fargo and Bank of America have flagrantly violated those obligations, putting hundreds of homeowners across New York at greater risk of foreclosure," Schneiderman said. "I intend to use every tool available to my office to hold these companies accountable."
Schneiderman said his lawsuit threat "obviously has implications" for the other three banks involved in the settlement. Housing organizations in New York said they had lodged similar complaints against the banks with Schneiderman's office.
"I continue to believe there are areas in which the banks must improve their treatment of their customers," Smith said in response. "I intend to use the full breadth of my power under the settlement to hold the banks accountable."
Both Wells Fargo and Bank of America responded to the announcement as well.
"It is unfortunate that the New York Attorney General has chosen this route rather than engage in a constructive dialogue through the established dispute resolution process," a spokesperson for Wells Fargo said. "We fully support the rules established under the Settlement."
Bank of America said it will "work quickly" to address the 129 "customer servicing problems" that Schneiderman identified. The bank added that it has provided more than 10,000 New York homeowners with more than $1 billion in aid.
The settlement for the first time legally requires the five banks to meet a variety of timelines. In addition to the 30-day window to tell borrowers whether their applications have been approved, they must notify borrowers within three business days that they have received loan modification applications and within five days if the application is missing key details or documents.
Over the last few years, consumer advocates and government officials have repeatedly complained of banks losing borrowers’ documents and forcing them to wait months for basic decisions to be made on their applications for loan modifications.
In a February report, Smith said that he had received more than 600 complaints detailing shortcomings in the banks’ dealings with borrowers. The majority of them concerned issues such as failures to decide on loan modification requests within 30 days.
Smith said that of “particular concern” were reports that borrowers were having to submit documents multiple times to their mortgage servicers, sometimes with no response or followed by requests for the same documents yet again.
"The striking thing about the timeline violation is that they’re so pervasive. It’s the exception rather than the rule when modifications requests are addressed without delay," said Joseph Sant, staff attorney with the Staten Island Legal Services Homeowner Defense Project.
Last month, The Huffington Post reported that Schneiderman has complained to key Democratic lawmakers on Capitol Hill that the Obama administration has not aggressively investigated the kind of dodgy mortgage deals that helped trigger the financial crisis. Schneiderman critics allege that he, too, has compiled a lackluster enforcement record against Wall Street.
His threat to sue Wells Fargo and Bank of America comes a few days after he withdrew his objection to a separate proposed $8.5 billion settlement between Bank of America and a group of mortgage investors over soured loans. In 2011, Schneiderman asked a state judge to reject the pact on the grounds that a party to the settlement had committed fraud and had failed to act in the best interests of the investors.
Eleazar Melendez contributed reporting.