National Mortgage Settlement Summary

The five largest mortgage servicers recently agreed to a $25 billion settlement over some questionable mortgage loan servicing and foreclosure practices, including the so-called “robo-signing” activities that came to light in late 2010. Robo-signing refers to the practice of signing mortgage documents without verifying their accuracy as well as other procedural errors. The five mortgage servicers—Ally Financial, Bank of America, Citigroup, JPMorgan Chase and Wells Fargo—collectively service nearly 60 percent of the U.S. mortgage market. While mortgage loan servicers collect and process mortgage payments and handle defaults and foreclosures, the servicers often do not own the underlying loans.

The national mortgage settlement—which involved more than a year of negotiations with the states’ attorneys general, the U.S. Department of Justice and other federal agencies—includes direct payments to the federal government, the participating 49 states and individual borrowers. Oklahoma was the only state not to join the settlement, choosing to settle separately with the five servicers for $18.6 million.

The federal government will receive $912 million for five whistleblower lawsuits and losses incurred by the FHA Capital Reserve Account, the Veterans Housing Benefit Program Fund and the Rural Housing Service. The 49 participating states will split $2.5 billion based on criteria such as the number of foreclosures and other factors, with California, Florida, Texas, New York and Illinois receiving the largest amounts respectively. The settlement agreement allows each state to designate up to 10 percent of the amount paid to each state as a civil penalty, fine or similar payment.

The National Association of Attorneys General will receive $15 million to create and administer the “Financial Services and Consumer Protection Enforcement, Education and Training Fund.” The Conference of State Bank Supervisors will receive $65 million—$15 million will establish the “State Financial Regulation Fund” and $1 million will go to each state financial regulator who signed the consent judgment. The state members of the executive committee who negotiated the settlement and the Ameriquest Financial Services Fund will split $10 million to cover costs and attorneys’ fees. Qualifying individuals whose homes were sold or taken in foreclosure between Jan. 1, 2008, and Dec. 31, 2011, who submit claims, will receive cash payments from the $1.5 billion set aside for that purpose.

Nearly $3 billion is committed to refinance “underwater” mortgages, for borrowers who are current on their payments, but whose mortgage is more than their home’s current market value. The remaining settlement money, approximately $17 billion, is dedicated to consumers for mortgage modifications, short sales, deficiency waivers, anti-blight prevention activities and principal forbearance for unemployed borrowers, along with specific short sale provisions for military borrowers. Each servicer will receive credit for completing these consumer relief activities; however since only some count dollar-for-dollar, the banks will end up providing consumer relief in excess of the nearly $17 billion specified in the consent judgment.

Approved by U.S. District Judge Rosemary Collyer on April 4, the settlement is now effective. The five servicers have seven days—until April 11—to deposit their portions of the settlement into an escrow account. The consent judgment remains in effect for three and a half years, but the servicers are required to earn 75 percent of the consumer relief credits within the first two years or pay substantial cash penalties. Direct payments to mortgage borrowers will begin once a settlement administrator is retained, within 90 days of the settlement’s effective date.

In addition to the payments, the servicers have agreed to follow new standards for handling mortgage loans and foreclosures. During the term of the settlement agreement, the servicers will oversee and manage third-party providers, such as foreclosure firms, law firms and independent contractors. The servicers must establish an easily accessible and reliable single point of contact for each first lien mortgage borrower and develop an online site where borrowers can check the status of their loan modifications.

“Dual tracking” practices are restricted under the agreement. Servicers are also prohibited from adopting employee compensation arrangements that encourage foreclosure over loss mitigation alternatives. The settlement also requires more transparency in the mortgage servicing process, such as making the general requirements for short sales more available. In addition, the settlement enhances protections for military personnel.

Joseph A. Smith, Jr., former North Carolina banking commissioner, will supervise the implementation of the settlement, along with the monitoring committee comprised of representatives from the state attorneys general, state financial regulators, the U.S. Department of Justice and the U.S. Department of Housing and Urban Development. He is responsible for determining whether the five financial institutions are in compliance with the servicing standards and have satisfied the relief requirements in accordance with the consent judgment.

Although the settlement resolves some violations, the federal government and state attorneys general did not release all the potential claims against these five servicers. The federal government and states can still pursue criminal prosecutions for criminal offenses and violations of the fair lending laws based on discriminatory conduct. Securitization claims based on the offer, sale or purchase of mortgage securities are not released by the settlement. The states also did not release any potential claims against Mortgage Electronic Registration Systems, Inc., MERSCORP, Inc. or any tax claims relating to real estate transfer taxes. Mortgage borrowers can still file claims on an individual or class action basis.

To review the settlement documents for each servicer, go to www.NationalMortgageSettlement.com. As of August 28, 22 states—Arizona, Arkansas, Colorado, Connecticut, Georgia, Idaho, Indiana, Kentucky, Maryland, Massachusetts, Michigan, Mississippi, Montana, Nebraska, Nevada, North Carolina, Rhode Island, Tennessee,  Utah, Vermont, Virginia and Washington—had finalized how they plan to use their share of the settlement funds.

NOTE:  If you have questions regarding an individual mortgage, please contact an attorney in your state or the Office of Mortgage Oversight. NCSL is unable to provide assistance or advice in individual cases.