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Bank of America suit under scrutiny of settlement watchdog

Claims by former Bank of America employees that they were offered incentives to deny mortgage modifications have caught the attention of the national mortgage settlement’s monitor.

Joseph Smith, who oversees the $25 billion settlement reached last year with 49 states and five major banks, including Bank of America, said he’s examining a lawsuit in federal court in Massachusetts for any evidence that the bank violated the agreement.

The former employees’ allegations are in affidavits filed as part of the lawsuit.

“The allegations are serious,” said Smith, who added he intends to review the court documents.

The lawsuit generated renewed attention in June when former Bank of America employees, including at least one who worked in Charlotte, filed statements alleging that the bank offered cash bonuses and gift cards to employees who forced a certain number of homeowners into foreclosure. The homeowners claim they were wrongly denied requests for modifications under the federal Home Affordable Modification Program, designed to lower monthly mortgage payments for struggling borrowers.

In his statement, William Wilson, the Charlotte-based employee, described workers being made to participate in a “blitz.” During those, he wrote, the bank would order case managers and underwriters to “clean out” a backlog of HAMP requests by denying all those whose financial documents were more than 60 days old.

Bank of America has denied the employees’ accusations, calling them “absurd.” The bank is expected to file a formal response to the claims sometime in July.

Smith, a former North Carolina banking commissioner, doesn’t have watchdog authority over federal program, which is funded by the Troubled Asset Relief Program. TARP has its own special inspector general to investigate fraud and waste in the program.

As monitor of the mortgage settlement, Smith must determine whether banks are meeting servicing standards to which they agreed. The standards, which took effect in October, are designed to “make foreclosure a last resort” by requiring servicers to evaluate homeowners for foreclosure alternatives first.

Smith has the authority to impose fines on banks if he determines they failed to meet servicing standards.

“We are taking a look at it,” Smith said of the lawsuit. “I don’t think there’s any question at all that the settlement was clearly intended to address allegations of the kind that are being made in the Massachusetts lawsuit.”

Suit dates to 2010

The lawsuit was filed in 2010, the year after HAMP was launched. Homeowners sued Bank of America, claiming it breached contracts with them by failing to modify mortgages and prevent foreclosures.

It’s unclear how much the lawsuit might cost Bank of America. A hearing on a request for class-action status is set for August.

The statements from seven former Bank of America employees, including one contractor, were filed in court in June. Attorneys say their allegations buttress claims by the homeowners, who accuse Bank of America of asking them to resubmit the same paperwork over and over as well as other hassles in dealing with the bank.

The bank, the lawsuit says, “serially strung out, delayed and otherwise hindered the modification processes.”

Lenders who participate in HAMP can receive an incentive of $1,000 for every mortgage they modify. But the lawsuit against Bank of America says the incentives are “countered by a number of financial factors that make it more profitable for a mortgage servicer such as BOA to avoid modification and to continue to keep a mortgage in a state of default or distress and to push loans toward foreclosure.”

A Charlotte underwriter

Wilson, an underwriter, worked for the bank from June 2010 to August of last year, according to his statement. The bank has declined to disclose where Wilson worked in Charlotte, but, according to his statement, he was promoted in July 2011 to supervise Bank of America employees who worked on HAMP files.

Wilson, in his statement, said the bank would deliberately delay HAMP applicants.

“Delay was achieved using tactics including claiming that documents were incomplete or missing when they were not, or simply claiming the file was ‘under review’ when it was not,” he said. “We were instructed to delay and then push homeowners to accept an internal refinance so that Bank of America would profit.”

Many of the applicants were entitled to a HAMP modification, he said, “but had little choice but to accept a more expensive and less favorable in-house modification.”

About twice a month, the bank would conduct a “blitz,” kicking out files “in which the homeowner had provided all required financial documents and fully complied with the terms of a trial period plan,” he said.

In a blitz, a single team would decline as many as 1,500 HAMP applicants for no reason other than documents being more than 60 days old, he said.

Feds asked to investigate

The Bank of America employees’ statements have prompted California Rep. Maxine Waters, the top Democrat on the House Financial Services Committee, to call for federal officials to investigate the bank. It remains unclear whether her request will lead to a probe.

Waters, in June 18 letters to federal officials, asked for an investigation of “these claims at Bank of America or any other servicer” that might have benefitted from misleading borrowers eligible for HAMP.

“It has been noted in numerous studies that foreclosure is often the most profitable end result for a servicer that does not own the loan they are servicing,” she wrote. “It goes without saying that this is an outright abuse of consumers and government mortgage assistance programs.”

Rep. Robert Pittenger, a Republican who represents Charlotte and also serves on the Financial Services Committee, hasn’t joined Waters in her request for an investigation of the bank.

“This is not a congressional issue,” he said. “This is a lawsuit.

“It’s not a criminal investigation. So, I think we need to step back and allow the judicial process to work. Certainly, if there’s wrongdoing, that should be addressed.”

Pittenger’s office said he has received 17 mortgage-related complaints about Bank of America and Wells Fargo from constituents since taking office in January. Some of the complaints, such as borrowers having to deal with multiple contacts at their bank, are not supposed to happen in the wake of the National Mortgage Settlement.

Pittenger called the 17 complaints “not a major number,” considering the banks’ massive market shares.

“I have seen evidence, strong evidence, that the banks have been there, been accessible and helpful to thousands of people,” he said.

Bank failed 2 tests

Smith announced in June that Bank of America in the first quarter had failed two of 29 tests designed to see whether it’s following the rules of the settlement. One requires banks to provide correct information in letters sent to homeowners before sending them into foreclosure. The other requires banks to tell borrowers working on a loan modification whether they have sent in all the correct documents within five days.

It’s not clear whether the Massachusetts case will yield any settlement violations. The five big banks had until October of last year to begin implementing the servicing standards and fully complying with the settlement’s 304 rules. Smith says he will determine whether any violations occurred after October.

“What I’m interested in is enforcing the settlement,” he said.

Roberts: 704-358-5248; Twitter: @DeonERoberts
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