Banks agreed to change their behavior as part of the robo-mortgage settlement announced last week. The announcement, however, left open critical questions: How will the new settlement be enforced? Does the settlement include new, pre-defined penalties for banks that fail to uphold their new promises?
Since changes in the future behavior of banks may be the most important part of the settlement, the absence of an answer to these questions is shocking.
The banks have a long, and well-documented history of agreeing to settlements related to changes in their behavior, and then failing to comply with these legal agreements.
As a result, the way this agreement will be enforced, and the penalties associated with failing to comply with it, are particularly important. Indeed, public officials recognize the central significance of this issue and have given the appearance of penalties for noncompliance by a bank of $1 to $5 million per incident. Unfortunately, at this moment, these penalties look more like wishful thinking than part of a legally binding agreement.
In the days since the settlement's announcement, a seemingly unbelievable possibility has emerged: the details of the critical enforcement provisions may not yet exist.
Every reporter, representing news outlets including The Huffington Post and the New York Times, who has sought to understand these critical points has been rebuffed with a deafening silence. No interviews have been granted. No details have been released. As a result, one is forced to ask: Do the enforcement details actually exist?
At this moment, the nation has no idea whether this settlement is meaningful, or whether it is an extreme example of public officials misleading the public with false promises of bank compliance ensured by stiff penlalties, when the actual penalties have the potential to be meaningless.
Here's the background: When the settlement was initially announced, the Associated Press reported reported:
"The conditions will be overseen by Joseph A Smith Jr., North Carolina's banking commissioner. Lenders that violate the deal could face $1 million penalties per violation and up to $5 million for repeat violators."
My initial impression on reading this report was that the settlement, unlike past agreements, has real teeth to it. The AP release makes it sound like the banks were agreeing to pay $1 million dollars each time they fail to perform as promised.
However, when I checked the actual press release from the Department of Justice, which announced the deal, I found that it reads (emphasis added):
"Compliance with the agreement will be overseen by an independent monitor, Joseph A. Smith Jr. Smith has served as the North Carolina Commissioner of Banks since 2002… The monitor will oversee implementation of the servicing standards required by the agreement; impose penalties of up to $1 million per violation (or up to $5 million for certain repeat violations); and publish regular public reports that identify any quarter in which a servicer fell short of the standards imposed in the settlement."
The language of the Justice Department press release raises two central questions. First, what does “up to” mean? Does the independent monitor have discretion over the size of each penalty? This could effectively make the million dollar figures announced by the Justice Department meaningless. Banks have argued that the tens of thousands of robo-mortgage signatures and well-documented servicing errors were all technical violations that harmed no one. Undoubtedly, they will argue that any single violation was a meaningless error.
This provision would have real meaning if we applied the same standard our nation has applied in other areas: a zero tolerance rule. What would happen if each bank knew that any violation would result in a minimum fine of $1 million? I suspect bank behavior would change significantly.
Second, can banks contest these fines? Have the banks agreed that they will pay any fines assessed by the independent monitor? If not, then once again the provisions have the potential to be meaningless. The monitor will assess fines for violations and the banks will challenge the fines through whatever venues, the courts or otherwise, have been established by the settlement. The judgment and ability of the independent monitor to set fines will have been eviscerated.
Here's why this matters: There appears to be near universal agreement that this settlement will do little for homeowners who have been the victims of past bad bank behavior. But there may be real value in the deal if it successfully changes bank behavior going forward. On Friday, the New York Times quoted Roy Cooper, the attorney general of North Carolina as saying, "This agreement is more important for the foreclosures we’re hoping to prevent" (emphasis added).
At the same time, the New York Times wrote, “Advocates for homeowners facing foreclosure expressed cautious optimism,” but indicated that these same advocates believe rigorous enforcement is essential for the program to work:
"We’re hopeful,” said Joseph Sant, a lawyer at Staten Island Legal Services’ homeowner defense project. “But we had a lot of programs that are good on paper. What will make the difference is that it’s vigorously enforced."
On Sunday, Gretchen Morgenson devoted the second half of her New York Times feature story, The Deal is Done, but Hold the Applause to the importance of enforcement provisions. She wrote:
But perhaps the largest question looming over this settlement is how it will be policed. Recent history is littered with agreements that required banks to take specific steps to make amends. All too often, the banks have skated away from their promises.
Morgenson then recounts a series of instances where the banks have failed to comply with past settlements, including this quote from a former judge involved in these processes and her conclusion:
"It's astounding that in such a huge percentage of cases the lenders are not complying," said Philip A. Olsen, a former Nevada Supreme Court settlement conference judge. "The banks have learned that they can thumb their noses at the program and it won't cost them anything."
So you have to wonder whether banks will thumb their noses at last week's settlement, too. That makes policing compliance crucial.
Here's why skepticism appears to be warranted: First, on Friday afternoon, American Banker reported the astonishing news that no written term sheet for the settlement exists. As impossible as it may sound, it appears there is no piece of paper that details anything more than the vague principles (included in the original Justice Department press release) the banks, the state attorney's general and the federal government have agreed upon.
In an article titled, Missing Settlement Document Raises Doubts on $25B Deal, American Banker reported:
More than a day after the announcement of a mammoth national mortgage servicing settlement, the actual terms of the deal still aren't public...
That's because a fully authorized, legally binding deal has not been inked yet.
The implication of this is hard to say. Spokespersons for both the Iowa attorney general's office and the Department of Justice both told American Banker that the actual settlement will not be made public until it is submitted to a court. A representative for the North Carolina attorney general downplayed the significance of the document's non-final status, saying that the terms were already fixed....
Other sources who spoke with American Banker raised doubts that everything is yet in place. A person familiar with the mortgage servicing pact says that a settlement term sheet does not yet exist. (emphasis added)
Second, no one has been able to determine how, when, or why the stated fines of $1 million to $5 million will be levied, and efforts to determine answers to these and related questions have seemingly been rebuffed. Late Thursday, The Huffington Post reported on its efforts to understand the details of the enforcement provisions of the settlement:
"North Carolina banking commissioner Joseph Smith will serve as the national monitor of the deal, working from Raleigh...
The announcement on Thursday did not include any new information on bank penalties. A call to Smith's office was not immediately returned. A HUD spokesman did not immediately return an e-mailed request for comment."
Similarly, on Sunday, in discussing compliance in her New York Times feature, Morgenson wrote:
That task falls to Joseph A. Smith Jr., the banking commissioner for North Carolina since 2002. Not only must he oversee the monetary relief programs in the settlement, he must also enforce extensive changes to loan-servicing practices that the deal entails.
I had hoped to ask Mr. Smith how he planned to monitor the expansive and arcane terms of the settlement and what size of army he would be deploying to ensure that the banks fulfilled their promises. But he was not available on Friday to answer my questions.
Morgenson was forced to discuss vague plans for enforcement from "An administration official, speaking on condition of anonymity because he was not authorized to discuss the deal." None of these comments answered the critical questions, discussed above, related to when, how, and with what finality Smith could impose fines.
Whether warranted or not, these events all create the public impression that the settlement was not finalized, but the parties involved rushed to obtain the PR associated with announcing an agreement. The natural consequence of this is that public officials have created the appearance that they have something to hide. At a time, when public trust in government is waning and mistrust of financial institutions is exploding, this is the worst kind of behavior. It runs the risk of accelerating the rising cynicism and mistrust that is undermining the fabric of our society. It is inexcusable.
The stakes here are enormous. They extend beyond the housing market to the nature of American society itself. The banks’ blatant malfeasance with regard to the robo-mortgage scandal and other foreclosure-related activities has been a clear example of unequal justice. The banks have knowingly and repeatedly violated laws (such as providing tens of thousands of false affidavits to the courts) that would have landed an ordinary citizen in jail.
At the same time, successful capitalism itself depends on the enforcement of rules and contracts in a fair bargain that all participants believe will be enforced by the courts. When powerful players are permitted to alter established rules at will, capitalism ultimately collapses. Contracts and the idea of a fair bargain become meaningless as less powerful parties to an agreement know their rights will not be enforced. Over time, citizens lose faith in government and their own ability to thrive in what becomes a corrupt economy. If the settlement enforcement provisions turn out to lack substance, these forces will be reinforced rather than counteracted.
Now, we must wait for the details. I am hopeful that my question is ill-founded and detailed enforcement provisions do, in fact, exist. Like homeowner defense advocates, I am also hopeful that the settlement includes meaningful enforcement provisions — but I am terrified that ultimately I will be disappointed.