Enforcement Process for Foreclosure Fraud Settlement Outlined

Keeping the door open for the fox? (photo: Phil Catterall/wikimedia)

Reuters has the latest on the foreclosure fraud settlement which now has a February 6 sign-on deadline. They tackle the very troubling issue of enforcement which has bedeviled past settlements with the banks, particularly on loan modifications. Reuters writes that the states would get some enforcement authority in the settlement:

A proposed settlement to resolve mortgage abuses by top U.S. banks will give states broad authority to punish firms that mistreat borrowers in the future, according to documents seen by Reuters on Wednesday.

Under the settlement, which states are currently reviewing to decide whether they will join, the states and a separate “monitoring committee” will have the authority to go to court to enforce the terms and seek penalties of up to $5 million per violation.

A strong enforcement mechanism could help the states and the Obama administration sell the deal to the public, after left-leaning activist groups have questioned whether the negotiations were too lenient on the banks.

Joseph Smith, the current banking commissioner of North Carolina, would become the enforcement monitor on the settlement. And states would get some more authority to directly enforce their own consumer protection statutes at the big banks. But get this, the initial measure of whether or not the banks are following the terms of the settlement will come from “internal quality control groups.” In other words, the foxes will guard the henhouse. The internal quality control groups will turn over quarterly reports (so abuses from January would theoretically not get discovered until April), and only at that point would the monitor be allowed to let a third party review the report if he finds improper implementation of them. But basically, this extends out the enforcement process by months and submits it to an initial gatekeeper run by the banks.

The fines of $1 million for the first violation and $5 million for a second could perhaps induce compliance, though I’m skeptical based on the process itself. And lest we believe that giving states a piece of the enforcement will help, that only depends on whether the state regulators believe in their job description. In fact, a recent NBER study showed that state bank regulators are often even more lax than the compliant federal ones:

“Federal regulators are significantly less lenient, downgrading supervisory ratings about twice as frequently as state supervisors. Under federal regulators, banks report higher nonperforming loans, more delinquent loans, higher regulatory capital ratios, and lower [return on assets]. There is a higher frequency of bank failures and problem-bank rates in states with more lenient supervision relative to the federal benchmark.” […]

Why are state regulators so much more lax? The authors argue that it could be attributed partly to banks being required to pay state regulators assessment fees that are pegged to bank size. As a result, “it is possible that state supervisors maintain a more lenient stance to ensure that banks do not shift out of a given state in search of another state with even softer state regulators.”

Exactly. These are the state meal tickets we’re talking about and the banks hold that over the heads of the regulators.

At least one Democratic AG, Oregon’s John Kroger, has said he would sign on to the settlement. HUD Secretary Shaun Donovan said at a White House press briefing that a deal could be announced “in the coming days.”

While liberal commentators put their hope in a savior at least somebody should pause and look at this settlement and what is actually happening to absolve one of the biggest consumer frauds in US history.

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