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Center for Responsible Lending Offers Misguided Praise of Proposed Foreclosure Fraud Settlement

Over the next couple weeks, as more dribbles out about the settlement terms on the table for foreclosure fraud, you’re going to see more of the institutional groups take positions. And there are going to be some conflicts of interest in those positions. I’m not saying that’s what’s at work with this Center for Responsible Lending endorsement of the settlement, but in general terms, it’s going to be a problem for critics who feel this settlement comes up way short of what’s needed.

Not all details are available yet, and we will continue evaluating the agreement as it becomes available. Based on current information, we are pleased to see a number of key reforms, including:

No more robo-signing. Banks would agree that key foreclosure documents will be individually reviewed as required by law.

End of many servicing abuses. The banks would agree to adopt many practices that will result in better communication, fewer delays, and fairer treatment for homeowners who are late on house payments.

More sustainable loan modifications. The settlement would require banks to get serious about reducing the principal balances on mortgages for struggling homeowners, possibly preventing hundreds of thousands of unnecessary foreclosures.

Banks remain accountable. While the state AGs would not be able to bring additional origination or servicing claims against the participating banks, the settlement would preserve the ability of homeowners to pursue claims against banks. Moreover, the settlement would not shield banks from prosecution related to criminal activities, claims based on mortgage securities violations, fair lending suits, or claims against MERS. Finally, the settlement would be enforceable in court by an independent monitor.

Just a couple things here. First of all, every major bank executive has testifed to Congress in the past two years, under penalty of perjury, that they have stopped robo-signing. But in fact, the banks are still robo-signing. So the idea that a settlement will stop what executives are willing to perjure themselves over isn’t clear to me. In fact, the banks have been robo-signing since the late 1990s; I see no reason why they would stop. Second, the vaunted servicing overhaul is already a feature of the OCC consent decrees, as I recall, and would just be recapitulated here, although we haven’t seen the final language. The proposed principal reduction would help just a sliver of the market and on average not reduce their LTV (loan to value) ratios under 100%, which is the danger zone for delinquency based on the data, and because it’s not earmarked, would probably go more to people with larger loans to eat up the credits as much as possible.

I’d love to know more about the enforcement from an “independent monitor,” a new one on me, and the extent of the liability release, which last I heard would include securitization. But we’re all going off various term sheets here. What I know is this: the settlement is too small to make a difference in the housing market, too unenforceable by historical standards to trust, and gives up far too much, not only in liability, but in protecting the banks from the necessary process of ending their reign over the economic architecture of this country. And CRL is flat wrong that this settlement would “wrap up a year-long investigation.” It would wrap up a year-long negotiation; we skipped the investigation and went right to the settlement.

So why is CRL, generally good on housing and servicer abuse issues, playing ball? Maybe some higher-ups are threatening their funding. I don’t know for sure. But there is a pot of money in this bill that would go to legal aid services. I know there are a lot of housing advocates salivating over that money. This doesn’t fully intersect with CRL’s responsibility, but there’s no question that housing advocates with an interest in furthering their projects might fixate on that money and ignore some of the other parts of this settlement. In CRL’s case, they are fixated on servicing, that has been the subject of a lot of their research. So they gravitate to that point, where they think this settlement will be helpful.

I reject that premise. Accepting a bad settlement that won’t fix much and will let banks off the hook for prosecutable crimes because of the financial benefit, or the goodies in a particular core area of inquiry, is frankly shameful. You should be able to defend this deal on the facts. And I don’t really think that’s possible. Neither do the Justice Democrats who are reluctant to sign on to it.

UPDATE: A spokesperson for CRL denies that any funders have threatened their support, and adds that they have no claim on legal aid dollars in the deal. The spokesperson added that the endorsement was highly qualified and that it expressed “tentative” support.

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David Dayen

David Dayen