January 07, 2013
The Foreclosure and BofA/Fannie Settlements
Posted by David Zaring

The banks moved today to put a large chunk of the blame for the financial crisis behind them with big dollar settlements.  BofA settled Fannie suit against its Countrywide acquisition, alleging that the mortgages it sold to federal packager were done with fraudulent misrepresentations, thereby violating the False Claims Act.  BofA press release here, story here.  The topline number is $10 billion, but only $3.6 billion of that is a fine.

That's more than BofA will be paying in the global settlement of mortgage foreclosure chicancery also announced today, which will cost 14 banks (i.e., basically all the big ones) $8.5 billion in total.  That is smaller than the settlement with state AGs for the same stuff, which was brokered by the Department of Justice.  This settlement is with the banking regulators, and in both cases the relief is meant to go to homeowners, this time in cash, rather than through a cumbersome foreclosure relief process.

Some brief thoughts:

  • In including every bank in the settlement, the costs of this relief will be pretty easy to pass along to consumers, it seems to me.  No bank will be hurt disproportionately by the settlement, at least, unless the proportions are designed oddly.
  • At the same time, including every bank leads to a big number which is not so big as to threaten the safety and soundness of the banking system - which is, after all, the woe is us last line of defense for banks, and one that came up in the Standard Chartered money laundering settlement.
  • That is one of the reasons why it is very hard to interpret monetary settlements with financial intermediaries.  Taken together, the settlements aren't bad for Fannie's bottom line, will result in thousands of dollars of relief for homeowners subject to foreclosure, and yet may not really bother the bankers at all.
  • Semi-finally, a note of process, and one that shows the power of banking regulators.  Unless I missed something, this settlement has come to fruition absent the filing of even a complaint.  I don't even know what the theory of liability is, and OCC hasn't explained it to us.  They talk of earlier enforcement orders related to mortgage abuses, but those orders partly deal with the future conduct of banks, not the past.  And the part that does deal with the past refers to 12 U.S.C. 1818(b), which broadly prohibits banks from "unsafe and unsound" practices, including "management."  (Here is the BofA enforcement order in that proceeding, e.g.)  Again, this is not referred to in the current settlement notice for a case never filed.  And even if it is the legal theory, it means that the regulators are relying on their ability to ensure that banks are solvent to police their relationships with consumers; we created the CFPB partly because we thought that they frequenty failed to square that circle.
  • Interestingly, though, the federal regulators, even if they didn't get around to filing a case, did run the proposed settlement by stakeholders, consumer advocates, and others.  That's often what you get in finance - not so much notice and comment as informal checking in.

Administrative Law, Finance, Financial Crisis, Financial Institutions | Bookmark

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