Do you remember the brouhaha before the mortgage settlement was announced about the release? Recall, sports fans, as we stressed often, that this was a cash for release deal. The only motivating factor for the banks was the scope of the release. The Administration and attorneys general kept claiming the release was narrow, even as both the messaging (unintentionally) and snippets of disclosure suggested otherwise.
Remember that the Administration also trumpeted that enforcement would be tough, even as Abigail Field has shown that idea to be a joke. For instance, the servicing standards allow for the astonishing concept of an acceptable error rate. Banks aren’t permitted to make errors with your checking account and ding you an accidental $10,000 and get away with it. But with people’s most important asset, their homes, servicers are allowed a certain level of reportable errors, and many of them can be serious as far as borrowers are concerned. This is one example from her post:
Let’s return to page E-1-6, and look at the second metric, which applies to everyone with a mortgage: “Adherence to customer payment processing.” According to Column C, it’s not reportable error for the B.O.Bs to tell their computers that you paid less than you did, if “Amounts [are] understated by the greater $50.00 or 3% of the scheduled payment.”
Since most people don’t pay more than what they owe each month, posting less than you paid would seem to make you delinquent when you’re not. How can that be ok? What are the consequences? The servicing standards say the banks have to take your payment if you’re within $50, (See page A-5 at 3.a) but if your mortgage payment is $2000/month, 3% is $60. What if you start facing fees? What if you were trying to bring your account current and the bank screws up the data entry and starts foreclosing? Why isn’t that potentially devastating error reportable?
And again, it gets worse because of Column D. Again, reportable error has to happen 5% of the time to matter. There’s more than 50 million mortgages in the country. 5% of 50 million is 2.5 million. In a single year the banks can tell their computers that 2.5 million people paid so much less than they in fact paid that it’s reportable error, and still the bankers won’t get in trouble.
Most plainly, the bankers can tell 2.5 million people:
“Hey, you didn’t make your payment this month, your check’s short and we’re putting it in the no man’s land of a “suspense account” triggering delinquency and fees, even though you really did pay in full and have the canceled check to prove it. And guess what? No one but you cares; law enforcement won’t even consider dinging us for it.
I’m struggling with the same level of disbelief I had when I first learned that banks were systematically committing forgery.
She also points out that wrongful foreclosures at a 1% rate are acceptable. Procedures around real estate are deliberate because any error of this magnitude has devastating consequences. But this new provision means that 1%, or over 33,000 erroneous foreclosures since 2008 would be perfectly OK as far as the authorities are concerned.
Field also points out in a separate post that this deal is in no way done. Key points remain to be resolved, in particular, how the Monitor will supervise the pact. That’s a huge item, and leaving it unresolved shifts the power to the banks (if you don’t believe me, I refer you to what is happening to Dodd Frank).
But while these are important, notice the media silence about the release? Go have a look and you’ll see why. In the Bank of America example, as with the rest, it’s Exhibit F. It’s really long and not at all pleasant to try to parse. But you actually don’t have to in too much detail to discern what is wrong with it.
Now as verbose as it is, the form is, basically, “We fully and finally release everything except the stuff in Paragraph (11).” That starts on page F-29.
This formula, “we release everything except certain particulars” is not such a hot structure to begin with when you haven’t done investigations, as in there may be conduct you didn’t discover that surfaces later and it isn’t in your Paragraph (11) list that you are still free to pursue. But even worse, the Paragraph (11) list is poorly drafted. Many of its subsections invoke “Covered Servicing Conduct,” “Covered Origination Conduct,” and “Covered Bankruptcy Conduct” in describing what is not released. The problem is that while those terms are DISCUSSED at length at the top of the Exhibit, they are not clearly defined. They are included in the recitation of why there is a settlement to begin with, that the United States “contends that it has certain civil claims based on the COMPANY’s servicing…(the “Covered XXX Conduct).” And while each type of covered conduct is followed by a list of “deficiencies,” they are also open ended, to wit:
(1) Deficiencies in servicing residential mortgage loans for borrowers in bankruptcy relating to:
(a) The preparation, prosecution, documentation, substantiation, or filing of proofs of claim, motions seeking relief from the automatic stay, objections to plan
confirmation, motions to dismiss bankruptcy cases, and affidavits, declarations, and other mortgage-related documents in bankruptcy courts
This comes close to Schrodinger’s cat having been given a new half life in the most important legal deal in US history. The “covered conduct” is “certain claims,” or per Black’s Law Dictionary, “a demand of some matter as of right made by one person upon another, to do or to forbear to do some act or thing as a matter of duty.” But the claims aren’t nailed down. And that makes them open to challenge. And this isn’t my reading. I asked a law professor who has written journal articles on matters related to the settlement, and he criticized the release, in particular, the definitions. He said that if a regulator or prosecutor tried going after any of the misdeeds in Paragraph (11) whose description included one of the types of Covered Conduct, he’d give the bank 50/50 odds of winning the argument that the activity in question was not part of the Covered Conduct. Yet another “get out of jail free” card, with the only open question whether this was Administration design or incompetence.
As hedge fund manager David Einhorn apparently says of companies he sells short, “No matter how bad you think it is, it’s always worse.” And here, the single most important thing in the settlement deal to get right, the release, has, as we and others predicted, proven to be a travesty.