By Abigail Field, an attorney and writer
When the National Mortgage Settlement was announced, I called it an enforcement fraud because every major law enforcement entity in the country signed off on letting banks overcharge people, use fake documents and otherwise abuse homeowners with impunity, so long as they didn’t do it too many people for six straight months. Pigs could get fat, hogs would get slaughtered. (The legalese is in the settlement is “threshold error rate.”)
Or not; the maximum penalty for six months of too many violations was $1 million. Hard to see a deterrent effect of any kind in $1 million when the enforcement population is five of our biggest banks. (Sure, if the banks were really really bad in the same way for four total quarters the penalty could then be $5 mil, but c’mon, the settlement itself was more than 1000x that number, and the settlement didn’t drive change, it produced “threshold error rates.”)
And when this deal was done, it had Eric Schneiderman’s signature on it, something he gave for a task force that was obviously staffed to fail, as I noted at the time. But now it seems he’s got buyer’s remorse.
Now that that A.G. Schneiderman’s learned that Bank of America and Wells Fargo have failed to service 339 New Yorkers according to the standards dictated by the Settlement, he’s served notice he intends to sue. Not for money; for “equitable relief.” Though I’ve not seen a filing, I imagine if he actually will seek an injunction to get Wells and BofA to start complying with (specific performance of) the four servicing standards Schneiderman is targeting in his press release:
1. Borrower must receive written acknowledgement of receipt of a loan modification application within 3 business days or receipt.
Note, I didn’t find a metric to measure compliance with this. (Metrics in Table E-1 here.)
2. Servicer must notify borrower of all missing documents or deficiencies in the application within 5 business days of receipt of the borrower’s initial loan modification application.
Metric 6.b.i. measures compliance with this; 5% is the “threshold error rate.” I’ll bet that the 210 Wells violations, and the 129 BofA ones–collected over a year–are many fewer than 5% processed by either bank in a given quarter. So even if AG Schneiderman’s right, these violations alone wouldn’t be enough to trigger the monitor to take action.
3. Servicer must give borrower 30 days to submit missing documentation or correct a deficiency.
Same metric, same “threshold error rate.”
4. Servicer must make a decision on a complete loan modification application within 30 days.
Metric 6.b.ii measures this, and its threshold error rate is 10%.
To be fair to Schneiderman, the metrics are irrelevant from his perspective. He thinks he can enforce the servicing standards as presented in the glittery golden exhibit A. That is why his letter to the monitoring committee focuses on the standards in A, not the metrics in E.
I hope he’s right about that; I’m not sure. The Consent Judgment has language for both sides. Section II, top of page 3 says: “Defendant shall comply with the Servicing Standards, attached hereto as Exhibit A, in accordance with their terms and Section A of Exhibit E, attached hereto.” That part of Exhibit E has to do with the timeline for implementation. So far, so good for Schneiderman.
But then “Part IV. Enforcement,” at page 4 says “The Servicing Standards and Consumer Relief Requirements, Attached as Exhibits A and D, are incorporated herein as the judgment of this Court and shall be enforced with the authorities provided in the Enforcement Terms, attached hereto as Exhibit E.” That makes it sound like specific performance of A is defined in E.
Also troubling for Schneiderman is IX.A.2 of Exhibit A, a subsection under “IX. GENERAL PROVISIONS, DEFINITIONS, AND IMPLEMENTATION”:
2. In the event of a conflict between the requirements of the Agreement and [law or contract] … such that the Servicer cannot [comply with both without risking penalty], Servicer shall document such conflicts and notify the Monitor and the Monitoring Committee that [law or contract trumps the settlement]. Any associated Metric provided for in the Enforcement Terms will be adjusted accordingly.
That is, when Exhibit A talks about implementation of its standards, it references the metrics.
I’d love to hear from experienced litigators what they think “specific performance” means under the settlement–compliance with A or E?
What Schneiderman Can Get By Suing
Either way, here’s what Schneiderman can sue for:
Equitable Relief. An order directing non-monetary equitable relief, including injunctive relief, directing specific performance under the terms of this Consent Judgment, or other non-monetary corrective action.
At first blush it looks good: Schneiderman can go to the D.C. District Court and ask for an injunction ordering BofA/Wells to specifically perform–meaning live up to the letter–of the terms of the Consent Judgment. (See Exhibit E at J2 and 3 here.)
For a best case look, let’s assume Schneiderman can enforce Exhibit A without regard to Exhibit E. Let’s assume A.G. Schneiderman goes to D.C., gives a D.C. District Court Judge his documentation of the 339 violations, and promptly gets an injunction ordering specific performance of the four the standards in Exhibit A he’s focused on, without regard to the metrics. What then?
Well, either Wells/BofA suddenly overhaul their operations in a way they failed to do when they were facing down all 50 AGs and the Department of Justice, or they keep on keeping on. I’ll bet on the latter. In that case, presumably AG Schneiderman will find it reasonably straightforward to document more of the same kinds of violations. That is, he will be able to prove that Wells/BofA is in contempt of the injunction. What then?
I guess it depends on things not yet known, such as: will any bank bigwigs be named individually in the injunction, and thus at personal risk of contempt? Who will the judge be?
The law of civil contempt means that if the judge agrees Schneiderman can enforce Exhibit A without regard to E, and if the judge is genuinely interested in coercing compliance, the judge can. See this recitation of the standard in a 2011 U.S. District Court civil contempt order (admittedly Florida, not D.C.; anyone know if it’s dramatically different?):
In fashioning a remedy or sanction for civil contempt, a court has broad discretion, measured solely by the ‘requirements of full remedial relief.’” U.S. v. City of Miami, 195 F.3d 1292, 1298 (11 Cir. th 1999) (quoting Citronelle-Mobile, 943 F.2d at 1304). For example, a court may impose a coercive daily fine, a compensatory fine, attorney’s fees and expenses, and coercive incarceration. See U.S. v. United Mine Workers of Am., 330 U.S. 258, 303-04 (1947); see Smalbein >v. City of Daytona Beach, 353 F.3d 901, 907 (11th Cir. 2003). “In establishing the amount to impose, the court must consider several factors, including the character and magnitude of the harm threatened by continued contumacy, the probable effectiveness of any suggested sanction in bringing about compliance, and the amount of the contemnor’s financial resources and consequent seriousness of the burden to him.” Matter of Trinity Indus., Inc., 876 F.2d 1485, 1493-94 (11th Cir. 1989).
If the D.C. Circuit standard is similar, the judge has the power to coerce the banks to comply with whatever the judge deems appropriate–Exhibit A or E. If E, it’s not clear that a violation can be proved on what Schneiderman alleges. But assuming Schneiderman gets an injunction, documents non-compliance, and seeks contempt, would a judge be coercive? Would the judge order a high daily fine, or simply a “compensatory fine” that’s as arbitrary and useless as the checks from Rust Consulting?
Will Schneiderman Be Allowed to Sue?
Before Schneiderman can sue, he has to give the monitoring committing a chance to take over the action, which is a kind of lawsuit right of first refusal. The Committee, now in receipt of Schneiderman’s notice, has three weeks to decide whether or not to sue. If they say no, he has to (inexplicably) wait another three weeks before suing. So it may be 42 more days before the injunction is requested. (See Exhibit E at J2 here.)
What does it mean if the Committee decides to bring the suit? Is that more or less potent than Schneiderman going alone? People with more political insight would know better; I wouldn’t assume that the Committee taking the suit over is good, but sure, it could be. I’d rather see a bunch of AGs join Schneiderman’s suit and bring their own cases against the other three big banks that he could join. Enforce the 304 servicing standards a handful at a time. (Again, if Exhibit A is the standard; if it’s Exhibit E it’s not worth it.)
The Bottom Line
It’s really hard to see how this effort–even if A.G. Schneiderman triumphs–leads to the kind of systemic change that was possible when all of the liability for the banks’ bad acts was still on the table. You know, pre-settlement, when A.G. Schneiderman and a few other Democratic A.G.s looked like they were going to stand up for America and insist on a meaningful deal.
Consider, the most that can come of this is two of the five banks complying completely with four of the 304 Servicing Standards.
I’m not trying to trash this injunction effort; at least it brings the banks’ continuing bad acts, their seemingly constant bad faith, and the impotence of the enforcement fraud settlement back into the public eye. And maybe the threatened suit will even do some good for some New Yorkers. But it’s hard to be confident that this suit is the most effective way to be taking on the banks.
For example, the settlement’s liability release doesn’t cover all these new bad acts. When the SEC finds new acts in violation of prior injunctions, it typically brings new (albeit equally ineffective) enforcement actions. Maybe AG Schneiderman could use the new bad acts to bring a meaningful, new enforcement action. Or maybe there’s a different genre of banker bad action that could lead to more meaningful penalties, drive business model change and put bankers in jail.
I wish I could get excited about this threatened lawsuit. Just like I wish that watching SchoolHouse Rock’s I’m Just A Bill and Preamble didn’t make me cry. And yet I let my preschoolers watch them because I want them to grow up believing in the America that can be, if we Americans bring the transnational corporations and their parasitical executives to heel. It’s been done before, and can be done again. But deals like the National Mortgage Settlement, with all those law enforcers’ signatures, show that this President and this Congress aren’t going to do it.