Bloomberg News

Banks May Face Fraud, Municipal Claims After Mortgage Accord

October 11, 2011

(Updates with comment by Texas county official in 20th paragraph.)

Oct. 11 (Bloomberg) -- U.S. banks may still face state securities-fraud claims and municipal lawsuits over unpaid mortgage fees under a settlement that is “getting closer,” the official leading talks for state attorneys general said.

Iowa Attorney General Tom Miller said in an interview yesterday that any settlement wouldn’t prevent a growing number of municipalities from suing banks for allegedly cheating them out of millions of dollars in filing fees, or individual states from pursuing securities claims against banks.

“They won’t be released. They will go forward,” Miller said about securities claims brought by states. “There will be ongoing litigation” against the banks, he said.

State attorneys general and federal officials have been negotiating a settlement with the largest mortgage servicers, including Bank of America Corp., based in Charlotte, North Carolina, and New York-based JPMorgan Chase & Co. Officials are seeking an agreement that would fund loan modifications for homeowners and set requirements for how the banks conduct foreclosures.

“We’re getting closer to resolving it,” Miller said. “We still have issues that could frustrate the agreement, but we’re getting closer.”

Bank Representatives

Mark Rodgers, a spokesman for New York-based Citigroup Inc., one of the five banks involved in the talks, declined to comment on them. Gina Proia, a spokeswoman for Detroit-based Ally Financial Inc.; Jason Menke, a spokesman for San Francisco- based Wells Fargo & Co.; and Thomas A. Kelly, a JPMorgan spokesman, also declined to comment. Lawrence Grayson, a Bank of America representative, didn’t answer an e-mail.

An agreement is “essentially done” on the standards for how the banks will service mortgage loans, Iowa Assistant Attorney General Patrick Madigan said in an interview.

“It’s in many ways the most important work that we’ve done here,” he said of the servicing rules. “That’s something nobody else has been able to achieve, not Congress, not the federal banking regulators. This is something we’ve been able to achieve, and we’re very proud of it.”

Several attorneys general, including New York’s Eric Schneiderman, Delaware’s Beau Biden, and Massachusetts’s Martha Coakley, have raised concerns about the scope of the liability releases that would be given to the banks as part of any deal.

Bank Issues

They have said the banks shouldn’t receive releases for matters that haven’t been fully investigated, including the packaging of mortgage loans into securities and the use of a mortgage database known as MERS.

California Attorney General Kamala Harris said Sept. 30 that she was rejecting a proposed settlement with the banks and would conduct her own mortgage investigation because the state “was being asked for a broader release of claims than we can accept and to excuse conduct that has not been adequately investigated.”

“In return for this broad release of claims, the relief contemplated would allow too few California homeowners to stay in their homes,” she wrote in a letter to Miller and the Justice Department.

Coakley said in a statement last week that she was preparing to sue banks because she had “lost confidence” an agreement would be reached that holds the companies “accountable for wrongful foreclosures.”

In the interview, Miller said the agreement wouldn’t cover claims by county and state governments over unpaid mortgage filing fees.

States’ MERS Suit

Officials in Texas, Michigan and Kentucky sued Mortgage Electronic Registration Systems Inc. and lenders including Bank of America, claiming cash-strapped counties were cheated out of fees by an electronic system used to transfer mortgages.

Merscorp Inc.’s MERS tracks servicing rights and ownership interests in mortgage loans on its electronic registry, allowing banks to buy and sell loans without recording transfers with counties.

MERS acts as the lender’s nominee and remains the mortgagee of record as long as the note promising repayment is owned by a MERS member. Dallas County claims this allows banks to buy and sell loans without properly recording transfers with counties and paying the fee.

County and state officials across the U.S. have expressed interest in the litigation, Dallas County District Attorney Craig Watkins said after filing one of the suits last month.

County Lawyers

Lawyers for Harris County, Texas, which includes Houston, said last week they would ask the county government for permission to hire outside counsel to file a similar claim. The request, initially set for consideration today, likely will be heard by the Harris County Commissioners Court on Oct. 25, lawyers for the county said.

John Odam, Harris County assistant county attorney, said he was “definitely pleased” that the 50-state attorney general group wasn’t going to resolve claims over fees in settlement talks with the banks. “This is a local issue,” Odam said today in an interview. “The county attorneys want a seat at the table and to be part of any discussion.”

The clerks of Kentucky’s Christian and Washington counties sued MERS, Chase Home Mortgage Corp., CitiMortgage, Wells Fargo, Bank of America and others in federal court in Louisville in April over unpaid fees, seeking to represent all 120 counties in the state.

Washington County, Pennsylvania, sued U.S. Bank NA in state court over fees last month, contending that MERS was set up “for the express purpose of circumventing the payment of assignment of mortgage fees to county governments.” The suit, brought on behalf of all counties in the state, doesn’t name MERS as a defendant.

Janis Smith, a spokeswoman for Reston, Virginia-based Merscorp, declined to comment, saying in an e-mail that the company hasn’t been involved in the settlement discussions with state and federal officials.

--With assistance from James Sterngold in New York and Laurel Brubaker Calkins in Houston. Editors: Mary Romano and David E. Rovella.

To contact the reporters on this story: David McLaughlin in New York at dmclaughlin9@bloomberg.net; Margaret Cronin Fisk in Southfield, Michigan, at mcfisk@bloomberg.net.

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net.


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