On Feb. 9, Attorney General Peter F. Kilmartin announced Rhode Island’s $172 million share in the landmark federal-state agreement with the nation’s five largest mortgage-service providers over foreclosure abuses and nationwide mortgage-servicing practices. The $25 billion settlement involves alleged abuses practiced by Bank of America Corp., JPMorgan Chase & Co., Wells Fargo & Company, Citigroup Inc. and Ally Financial Inc., formerly known as GMAC. The settlement, which also addresses future mortgage loan-servicing practices, still requires the approval of a federal judge.
The settlement will benefit affected homeowners but does not include claims related to securitization of mortgage instruments, which are currently being investigated by the attorneys general of New York and Delaware. It also does not include the ongoing investigation of those responsible for misconduct contributing to the financial crisis through the pooling and sale of residential mortgage-backed securities by the Residential Mortgage-Backed Securities Working Group.
PBN: How did your office come to be involved in the federal lawsuit?
KILMARTIN: Around October 2010, the U.S. departments of justice, treasury, housing and urban development and a lot of states were looking into robo-signing, loan origination and those types of matters. It was decided to pool together and conduct a joint investigation.
Rhode Island is a nonjudicial foreclosure state, which means, robo-signing did not occur here as it did in other states. While robo-signing received the most attention, the investigation identified other servicer-related problems, including deceptive practices in the offering of loan modifications, telling consumers that a loan modification was imminent while simultaneously foreclosing.
The performance failures resulted in more than just poor customer service. Unnecessary foreclosures occurred due to failure to process homeowners’ requests for modified payments and shoddy documentation leading to protracted delays.
The process wasn’t working; it wasn’t working nationally, the problem was so big, so we became an active participant.
PBN: How was the settlement good for Rhode Island?
KILMARTIN: Without this settlement, Rhode Island, because of a lack of jurisdiction in our office, would have had no clear path to get compensation into the state for relief. Even if we had the jurisdiction it would have been years of litigation and cost a significant amount of money. By that time, many Rhode Islanders would have been forced out of their homes.
PBN: Did the suit cover criminal action?
KILMARTIN: No, none of this settlement relieves anyone from criminal liability. The lawsuit and the settlement [are] on the civil side, covering potential civil lawsuits or prosecution by either the federal government or individual states. [Rhode Island] still maintains our criminal jurisdiction; none of it has been waived.
PBN: As part of the settlement 10 pages of standard practices were developed for the banks. Do you think the list is complete?
KILMARTIN: I think it is comprehensive. What I like about now having mortgage-servicing standards is that once we have federal court approval, any violation of those standards now can be found in violation of a federal court order. If there are to be any irregularities there will be an independent monitor to make sure the banks uphold their agreements, Joseph A Smith Jr. the former commissioner of banks for North Carolina.
Now that there are standards I think you will see that they will become the national standard for all banks, not just the five major banks named in the settlement. They should become the industry norm.
Do I think they should have been done all along? Absolutely. Clearly they were not.
PBN: How will the actual settlements be initiated?
KILMARTIN: The banks will be doing a lot of the outreach themselves.
PBN: What about banks that were not named in the suit?
KILMARTIN: One hope is that the settlement puts pressure on Fannie Mae and Freddie Mac to come to the table. It is also hoped that the other players will also come to the table. These groups were not subject to the settlement so there is still pressure with regards to civil lawsuits. I think it would be smart of them to join the settlement.
This is the largest civil settlement ever. I think that provides a great incentive for those not covered to become a part of it.
The settlement targeted the largest banks in the country and represented about 60 percent of the market. I think the next tier of national banks needs to look at this seriously because clearly, they are still on the radar screen.
It is by no means out of the realm of possibility that the federal government and the states would pursue a settlement with the next tier, but this settlement should be finalized first.
PBN: This settlement is not the end of the matter?
KILMARTIN: By no means. It’s not the be all, end all, it’s not the panacea, it doesn’t cure the problem here or throughout the country. The settlement deals with only a segment of the market and excludes criminal investigations and securitization. We still plan to be diligent on those other issues.
PBN: What about the issue of securitization?
KILMARTIN: The president named New York Attorney General [Eric T.] Schneiderman to head the investigation, and he will be tenacious. He will be investigating the collapse of residential mortgage-backed securities. The presence of criminal activity, I don’t think it can be ruled out, and the existing settlement doesn’t exempt the banks. I’m sure they would have preferred it but all of the attorneys general, myself included, stood firm on that. •