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Banks to AGs on Servicing Fraud: Drop Dead

posted by Adam Levitin

Here's the banks' counterproposal for a servicing fraud settlement. I can sum it up in two words: drop dead.  Or two letters:  F.U. This proposals is so pathetically thin that it's not a good faith counterproposal. This document only deals with servicing standards--nothing in it whatsoever about penalties, modification quotas, etc. But even on servicing standards it is a bunch of empty promises to have internal controls and try harder. 

The first point about this counterproposal is simply to note what's absent from it:

(1) nothing about principal reductions

(2) nothing about second liens and conflicts of interest

(3) nothing about MERS (reserved for later)

(4) nothing about in-sourced vendor fees or force-placed insurance to affiliates. This makes the fees and force-place insurance sections pretty meaningless. 

(5) nothing about pyramiding of fees.

I'm sure I'm missing a bunch of important points that aren't addressed, but these seemed to be the most obvious ones. 

Next, it's worth noting just how little it actually promises and how cagey the promises are.  For many points it does not promise results.  Instead, it promises "processes reasonably designed" or "procedures reasonably designed" to do something or another. Basically a lot of it boils down to promises to implement internal controls, reviews, and procedures to make sure things don't happen again.

Put differently, this is the servicers' saying "trust us." Ummm, that's the whole problem. No one trusts the servicers--not investors, not homeowners. 

Let's look at some specific terms.  Orwell couldn't have drafted these any better:

(1) Loan Modifications.  What do the banks propose to do in the section entitled "loan modifications"?  Principal reductions? Interest rate reductions? Forbearance? Nah.  None of that stuff.  Instead they says no fees for modifications and we'll toss in a free overnight envelope. So the counterproposal to principal reduction mods is a free Fed-Ex mailer. 

(2) "Independent Review."  Part of the document has a heading of "independent review." One might have thought that was from a disinterested outside reviewer. Nope. It just means that there is an internal review by another reporting chain within the bank. This is a worthless promise. 

(3) Single point of contact. 

Servicer will provide a single point of contact ("SPOC"), which may be more than one person, to any first lien, owner occupied, borrower suffering a hardship through the loss mitigation processes...

Wait a sec.  What the hell is single-point of contact if it can be multiple people? A single phone number? A 1-800 number plus a loan ID accomplishes that. I get that SPOC is hard to do, but this sort of empty promise is insulting. It's already the situation. Also notice how this is contingent on the "borrower suffering a hardship through the loss mitigation processes"--what does that mean?  Is that all borrowers or just ones with some unspecified special circumstances in the bank's discretion? 

(4) End of Dual Track Process.  A major complaint has been that banks simultaneously proceed with foreclosure while negotiating loan mods.  So what do the banks propose to do about that here? They are offering that a loan will not be "referred" to foreclosure if (a) all documentation necessary for a mod review is submitted and (b) a mod decision has not been made.  That's a really small concession. Notice what it doesn't cover.  It doesn't mean that foreclosures in process will be halted, only that the process won't be started.  There's also the question of whether the referral will have magically "happened" before the documentation is received.  Oh wait, that document is an certified original, not an original certified copy, so your documentation isn't complete. Sorry....

(5) Borrower portal for electronic document submission.  I actually like this idea and had this is something that the Congressional Oversight Panel had suggested in a foreclosure report. But there's absolutely nothing that prevents servicers from doing this right now. This is hardly some big concession.  In fact, they've had just such a portal sitting in the garage for months via Hope Now. 

(6) Forgiveness of short sale deficiencies.  The banks are promising to try to forgive deficiencies associated with short sales. Uh, isn't that what a short sale is--the bank agrees to take the sale price in satisfaction of the debt? So what does is actually being promised here? 

(7) Affidavits. The banks are promising that affidavits will be sworn out by affiants with knowledge of the facts and in compliance with applicable state law, etc. In other words, that they'll comply with the law. Note how that differs from the AG proposal, which would have required various affidavits not only when required by law (as in judicial foreclosures), but also in nonjudicial foreclosures. A lto of commentators wrongly criticized the AG proposal for simply requiring compliance with the law without recognizing that it was expanding the affidavit requirement. The AGs were requiring something more; the banks are just saying that they'll follow the law. Once again, "trust us." 

(8) Chain of Title. I've saved my favorite for last. Here's what the proposal says:

Servicer shall implement processes reasonably designed to ensure that Servicer has properly documented an enforceable interest in the promissory note and mortgage (or deed of trust) under applicable state law, or is otherwise a proper party to the foreclosure action (as a result of agency or other similar status), including appropriate transfer and delivery of endorsed notes (which may be endorsed in blank) and assigned moretgages or deeds of trust at the formation of a residential mortgage-backed security, and lawful endorsement and assignment of the note and mortgage or deed of trust to reflect changes of ownership, all in accordance with applicable state law.

My initial read was, wow, they're saying that their going to make sure that chain of title is proper. But then I started to wonder about this. So it would require a process to document an enforceable interest. What does that mean? Does it mean that the servicer will provide the court with a statement of chain of title? That's not what's required, here, though. This seems to be an internal control process. 

Then I read further. This would seem to giving a blessing to endorsement of notes in blank. As a generic matter, as I've said before, that's fine. But if the PSA calls for something different, that's a problem. So it looks as if the servicers are trying to use the settlement as a way to change the legal requirements regarding the transfers of mortgages. Neither the Feds nor the AGs have the power to grant that, however. 

There is this interesting language about "appropriate transfer and delivery of endorsed notes and assigned mortgages...at the formation of a residential mortgage-backed security."  Is that a concession that transfers that occur after the closing date are invalid? I can't imagine so, so I'm puzzled by this.

And then there's the "all in accordance with applicable state law." I might be seeing a problem where there isn't one, but I worry that this is an attempt to change the applicable law in foreclosure litigation. The "applicable state law" phrase is used twice in this paragraph. First it is used in reference to the promissory note and mortgage. That would be the state law of the state where the property is located. But the state law governing the "appropriate transfer and delivery" of the notes and mortgages is not the state law of the property situs. It's the state law of the state governing the PSA (most likely New York). The way this paragraph is phrased, however, one would think that "applicable state law" would refer to the same state both times its used, and by using it first in reference to the situs state for the property, it would prime a reader to think that the situs law governs the transfers. 

There are lots of other points to criticize with this counterproposal, but it's hardly worthwhile doing so--it's such an obvious in-your-face document that it's really not worthwhile engaging with serious. This isn't the basis for a good faith discussion of mortgage servicing reform. It's simply another part of the banks' strategy to run the clock and thereby avoid doing principal reductions--that's what will cost them the big bucks, not a $20B fine.


What are the chances the banks get more than a slap on the wrist over all of this ?.....Looks like they have donated to enough campaigns to get away with breaking the law.

Everything which the foreclosing entities (not the banks) are producing in court is backdated,forged,fabricated and most likely notarized by someone who is not a notary, or was from another state,which voids the notarial function. These notes never made it into the "Trusts",and furthermore, the trusts existed only on paper. The MBS/RMBS are a sham,we are talking default debt,separation of the note from the mortgage,unsecured,so these jackwagons shouldn't be getting the house if they get the judgement. I don't know what the problem is with these Attorneys General,are they mentally challenged,or have no moral compass,or no legal knowledge of what is going on here? This is exhausting to watch them in action. (inaction)

The AG offer was so weak, there isn't any incentive for the banks to negotiate in good faith. They know the AGs have gotten all the chest-thumping mileage they can out of this, and Short Attention Span Theatre is now in full swing. They know this will ultimately fade to black.

When the initial proposal is a slap on the wrist what did they think the counter-proposal would be? The AG's might want to remember that, unlike the banks, they'll eventually need to stand for reelection.

Evidence is overwhelming that they've committed a string of crimes as a thank-you for an ongoing series of massive bailouts. Speaking of those bailouts what's up with the one's discussing "moral hazard" only in terms of borrowers?

The market should, could, and would have dealt with all this by burning the counter-proposal writers businesses down and forcing liquidation of the notes at a few cents on the dollar. Smarter bankers would have purchased them and refi'd them at miniscule amounts. Voila, consumer liquidity, no government money needed, and the most culpable parties would have taken the largest financial hit.

Once that didn't happen the government had and has an obligation to level their subsidy larded playing field by dictating to the banks. Allowing these Corporate Welfare Queens to continue pretending that they're somehow running legitimate, independent businesses is ludicrous.


The FTC make rules so that home owners can't even hire professional help and the OCC covers up the extent of the lies by forbidding national banks from providing loss mitigation data to the states.

Are there any advocacy groups collaborating to represent the hundreds of thousands of American home owners that have already been affected by these practices? Please tell me the Banking system will not get away with this as they appear to be poised to do!

Do you believe the battle can be waged one homeowner and loan at a time?

I would be interested in your highlighting anything that gives us hope that Justice will be served. And finally any thoughts you have with regard to using Fair Housing Complaints effectively in this battle.


American Middle-class Homeowner


I like your post American Middle-Class Homeowner. I was wondering the same thing. In my state there is legal aid for only certain counties so that leaves all others out to hang. Legal representation is an arm and a leg with no certainty they will not too mess you over....I am so weary and tired of this circus the bankers are putting on. Millions out there are recieving eviction notices and are wondering what happened what do they do now...who is gonna stand up for the average middle class that makes to much and not enough for certain things. Who will guide them throug fighting an eviction?

Screw the settlement. Start prosecuting already. Jeez.

Prosecutors? Start prosecuting. You giant pussies.

fraudulent control of escrow acount occ and ots stopped wells fargo from maneging escrow acount fraudulent moneys missing in excess of $10,000 00 and then after that fradulent forclosure saying iam 4 payments in arears when iam in excess of $1,000 00 dollers in credit fradulent serving of atterney and then world savings bank ie wachovia ie wells fargo didnt own the title to the note at the time of forclosure how can you forclose if you dont own the rights to the note that is fraud the legal consumer rights defence for the usa are a poor and i have been fobbed off the goverment new prior to the bank callapse what was going to happen and they fobbed me off passing me over from the controller of currancy to the office of thrift supervision who closed the case because the new what was goin on in the banking world WHY SHOULD THE TAX PAYER PAY FOR BANKS THAT ARE FRAUDULENT OBVOUSLEY YOU DONT HAVE TO BE ABRAIN SURGEN TO WORK OUT THAT MIDDLE CLASS PEOPLE ALL OVER THE WORLD PAY THE TAXES AND WHATS MORE IF WE THE TAX PAYER BAILED THEM OUT WHICH WE DID WE SHOULD HAVE INCENTIVES FROM THES BANKS THEY CAN CHARGE FOR OVERDRAWN WHO IS CHARGING THEM AND HOW MUCH AS INVESTERS WE SHOULD BE SHARE HOLDERS IE SHOULDNT WE ?


I like how you broke this down.. I think its ridiculous that the bank and AG's are totally ignoring the fraud, not providing restitution for those already foreclosed upon... those who have lost hearth and home. And still the government blames the homeowner while unemployment is double what it was just a couple of years ago.

we need new words to describe the outrage to convey anger and frustration without using expletives.

In an ironic twist the very as state AGs that were fighting against the OCC, because of the preemption law, to be able to protect consumers and punish fraudulent and deceptive mortgage origination are now aligned with the OCC to punish the consumers and protect the banks. It just shows how far the corruption has permeated the system.

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