Parties agree to landmark foreclosure settlement

After 16 months of investigation and several months of negotiations, federal and state regulators announced a landmark settlement with 5 of the nation’s largest banks regarding abuses in the mortgage servicing industry.

Arkansas Attorney General Dustin McDaniel joined his state counterparts and federal officials with the Department of Justice in announcing a $26 billion agreement that will bring $39.4 million to Arkansas.

The agreement provides direct financial relief to Arkansas consumers at risk of losing their homes to foreclosure and to those who currently owe more than their property is worth.

“This settlement will provide tangible benefits to struggling Arkansas homeowners in the form of principal write-downs and refinancing opportunities,” McDaniel said. “This is an important means for holding the banks accountable for their bad behavior during the mortgage crisis. We will continue to monitor the mortgage servicing industry and take further action if necessary.”

THE BACKGROUND
The investigation began over a “robo-signing” scandal, where financial institutions with large mortgage service arms foreclosed on homes without proper documentation or scrutiny.

The foreclosure action occurred in the wake of the economic meltdown led by an unstable home financing crisis caused in part by questionable lending practices and risky securitization schemes.

The 5 banks identified in today’s settlement includes Bank of America Corp., J.P. Morgan Chase & Co., Citigroup Inc., Wells Fargo & Co., and Ally Financial Inc., the company formerly known as GMAC. Nine other financial institutions are currently in discussions with regulators and could eventually add billions more to the settlement agreement.

Today’s announcement outlines a process for the banks to follow going forward on foreclosures. Some details include:
• Banks must spend settlement money to assist struggling homeowners with an emphasis on principle reduction;
• Banks would need to meet certain minimum targets, in terms of borrowers assisted;
• Banks must set new servicing standards in the wake of the robo-signing practices;
• Refinancing opportunities will be offered to homeowners who are current on their mortgages, but have no home equity;
• There is no provision to block states and other regulators from pursuing claims associated with securitization of mortgages; and,
• Settlement funds can be used by the states for mortgage assistance programs and housing counseling.

ARKANSAS DISTRIBUTION
Arkansas will receive an estimated $39.4 million in the settlement.

Of that, the lenders will dedicate approximately $11.8 million toward first- and second-lien principal reduction and other forms of loan modification relief in Arkansas. Another $5.7 million will be set aside for refinancing of loans to underwater borrowers.

Arkansans who lost their homes to foreclosure from Jan. 1, 2008, to Dec. 31, 2011, and suffered servicing abuse would be entitled to a share of approximately $8.5 million. By some national estimates, this may only result in payments totaling far less than the value of the homes lost.

A payment to the State of $13.4 million will be directed to government agencies that offer housing assistance and legal help to low- and middle-income Arkansans.

McDaniel said he would direct $9 million of those funds to the Arkansas Development Finance Authority in support of ADFA’s programs that provide down payment assistance to homebuyers, foreclosure counseling to existing homeowners and financial literacy programs, as well as other ADFA programs related to housing and economic development in the state.

The Arkansas Access to Justice Commission will receive $2 million to provide equal access to justice for Arkansans affected by the mortgage crisis. The University of Arkansas School of Law in Fayetteville and the University of Arkansas at Little Rock Bowen School of Law will each receive $500,000 to support legal aid clinics at both law schools.

Approximately $1.4 million will be directed to the state treasury for costs and fees associated with the settlement agreement.

McDaniel selected Deputy Attorney General Jim DePriest and Senior Assistant Attorney General Sarah Tacker to lead the state’s ongoing investigation into mortgage and foreclosure issues. DePriest heads the Attorney General’s Public Protection Department and Tacker is chief of that department’s Consumer Protection Division.

State lawmakers, with the backing of McDaniel, passed a new law in the 2011 regular session to deal with foreclosure practices in the wake of the national scandal that affected Arkansas. Act 885, sponsored by Rep. Tiffany Rogers, D-Stuttgart, required stricter notification to homeowners of potential foreclosure activity. It also mandated more disclosure on loan modifications to better protect homeowners.

“We worked a year ago to address the needs of homeowners who were contacting our Consumer Protection Division with issues related to mortgage servicing,” McDaniel said. “The multistate agreement incorporates what we have already done and sets the bar even higher for mortgage servicers in Arkansas.”