U.S. state attorneys general are pressing four banks to accept a legal settlement over botched foreclosures similar to a deal reached with larger competitors this year, according to three people briefed on the matter.
U.S. Bancorp (SFBC), PNC Financial Services Group (PNC) Inc., SunTrust Banks Inc. (STI) and HSBC Holdings Plc (HSBA) have held talks with state and federal officials who investigated claims that loan servicers mishandled foreclosure documents, according to the people, who spoke on condition of anonymity because the talks are private.
Neil Brazil, a spokesman for HSBC’s North America unit, said in an e-mail that the London-based lender has conducted “preliminary discussions with its bank regulators and other governmental agencies” and that “the timing of any settlement is not presently known.”
State attorneys general led by Tom Miller, a Democrat from Iowa, began an investigation of mortgage servicers in October 2010 after reports that practices including “robo-signing” had led to improper foreclosures. The probe led to a settlement in February among the five biggest servicers — JPMorgan Chase & Co. (JPM), Citigroup Inc. (C), Wells Fargo & Co. (WFC), Bank of America Corp. (BAC) and Ally Financial Inc. — and 49 states and the federal government.
Michael McCoy, a spokesman for Atlanta-based SunTrust, declined to comment, as did Frederick Solomon, a spokesman for Pittsburgh-based PNC and Tom Joyce, a spokesman for Minneapolis- based U.S. Bancorp.
The effects of the housing market collapse continue to be felt by these and other banks, not only on mortgage servicing. SunTrust said today it would set aside $375 million to repurchase faulty loans it may have originated, following PNC, which set aside $350 million in June.
The deal with the five largest mortgage servicers is valued at $25 billion, including $5 billion in payments to states and $20 billion that banks will use to compensate borrowers who lost their homes to foreclosures, forgive debt, give payment forbearances, arrange short sales and refinance mortgages at lower rates. It also specified new standards for fair servicing of mortgages. In return, the banks received limited protection from state litigation.
“The jury is still out on whether this gets fixed or whether the attorneys general will have to go after them,” Ira Rheingold, executive director of the National Association of Consumer Advocates, said in an interview.
The attorneys general made efforts to get the four smaller banks to join the February agreement — with proportionally smaller payments — before striking the deal with only the big five, one of the people briefed on the talks said.
In the last few months, the AGs have resumed the pressure on the smaller banks. In early August, they met in Washington with federal officials from the Department of Justice and the Department of Housing and Urban Development, and 12 state attorneys general including Miller.
Mortgage servicers typically handle billing and collections, as well as foreclosures when borrowers fail to pay. The four regional banks, whose mortgage portfolios are far smaller than those of the five larger banks, say the states have yet to demonstrate that a settlement would be more beneficial than letting banks handle customers’ problems individually, according to the people briefed on the talks.
Of the four banks, U.S. Bancorp has the largest share of the mortgage servicing market, with 2.5 percent in the second quarter of 2012, according to data from Inside Mortgage Finance, a trade publication. SunTrust had 1.5 percent, while PNC had 1.3 percent and HSBC 0.9 percent.
By contrast, Wells Fargo had 18.5 percent in the second quarter of the year, while Bank of America had 15.8 percent.
Miller spokesman Geoff Greenwood declined to comment, as did HUD’s Brian Sullivan and Adora Andy at the Department of Justice.
While the banks are resisting joining a deal, some have set aside funds for a possible settlement. Minneapolis-based U.S. Bancorp said in a filing for the quarter ended June 30 that it had accrued $130 million in reserves for any deal.
“If a settlement were reached it would likely include an agreement to comply with specified servicing standards, and settlement payments to governmental authorities as well as a monetary commitment that could be satisfied under various loan modification programs,” according to the filing.
Last year, HSBC — which has U.S. branches in states including Florida and New Jersey — set aside $257 million as its “estimated liability” in any settlement. PNC in January set aside $240 million for costs tied to residential mortgage foreclosures as a result of “ongoing governmental matters,” the company said in January.
Also in January, SunTrust said it couldn’t estimate the cost of any potential settlement with state attorneys general.