Wells Fargo Dragged Back To Court, Exposing Failures Of Mortgage Settlement


foreclosuregirl010813Eighteen months after signing onto a national settlement over foreclosure abuses, Wells Fargo is getting dragged back to court over the bank’s continued failure to comply with the settlement’s terms, and authorities who oversee the settlement are trying to salvage the ineffective agreement by rewriting its rules.

New York Attorney General Eric Schneiderman announced the Wells Fargo suit at a press conference on Wednesday, where he explained that after months of negotiations the bank “refused to acknowledge there’s a problem.”

The other major banks that are party to the 2012 National Mortgage Settlement (NMS) avoided renewed legal action by agreeing to tweaks to the settlement and by redoubling their commitments to do right by borrowers. Schneiderman had warned he might sue Bank of America on similar grounds to the Wells Fargo action filed Wednesday, but the North Carolina-based bank reached an agreement to improve its settlement compliance that satisfied the Attorney General.

There is abundant evidence that Wells Fargo and other major mortgage servicers continue to mislead, bully, and ignore borrowers despite the mortgage settlement. A review of mortgage servicer activity by the official NMS watchdog reported about 60,000 complaints of settlement violations in just six months. Such abuses are common among other firms beyond the five banks that signed onto the NMS, according to a recent Consumer Financial Protection Bureau review.

Those continuing widespread abuses produced a variety of tweaks to settlement conditions this week. On Tuesday, a committee of state attorneys general and federal regulators who oversee the settlement announced a variety of new procedures, including extended timelines for processing loan modifications and efforts to improve communication between banks, borrowers, and homeowner advocacy groups. “The banks also have promised to do a better job of overseeing employees who work with borrowers,” the Chicago Tribune reported. Since the original settlement was supposed to deliver those sorts of improvements to borrower communication and modification processing, Tuesday’s tweaks amount to a concession that the settlement isn’t working.

In a separate action on Wednesday, meanwhile, the court-appointed settlement monitor rolled out four new compliance tests that could trigger renewed legal action if they aren’t met. The monitor, Joseph A. Smith, announced two new ways to measure bank communication practices around loan modifications, one relating to information in monthly billing statements, and a fourth that measures how well banks provide borrowers with a single contact person on staff. All four new tests will be in action by the beginning of April.

Schneiderman’s suit and the rewiring of the settlement rules call attention to the gap between the topline dollar value of the original NMS – a much-touted $25 billion figure – and the actual impact it had on industry practices and embattled borrowers. The way the rules were written allowed banks to manipulate the settlement such that they never provided anywhere near as much money for foreclosure mitigation as that figure would imply. The settlement did send some $3.5 billion directly to homeowners, but most received checks for a few hundred dollars to compensate for bank behavior that cost them far more than that. Many declined to even cash those tiny checks. The settlement was also supposed to produce an independent review of foreclosure practices, but that process actually helped banks cover up their worst practices in the name of protecting “trade secrets.” After uncovering a quarter-million wrongful foreclosures and 1.2 million instances of homeowners successfully defending against illegitimate attempts to foreclose, the independent review was quashed.

The gulf between the NMS’ public profile and its real effects is just the most prominent example of how White House efforts to redress housing market abuses have delivered less than promised. The Justice Department (DOJ) recently admitted to dramatic exaggerations about what its mortgage fraud task force had achieved. Homeowner aid supposedly included in the Toxic Asset Relief Program (TARP) failed to materialize. A key program to encourage loan modifications never came close to reaching the number of borrowers it was supposed to and failed to prevent half of those it did reach from sliding back into default.