Now that Bank of America and the government have agreed in principle to a settlement that could reach $17 billion, the two sides are negotiating how the deal will compensate troubled borrowers, a person familiar with the talks told the Observer on Thursday.
After months of talks, the Charlotte bank last week reached an agreement in principle of between $16 billion and $17 billion with the Department of Justice to resolve a variety of mortgage-related civil probes. The deal was first reported Wednesday.
The settlement is expected to include roughly $9 billion in cash, plus $7 billion to $8 billion in consumer relief. The two sides are negotiating what forms the consumer relief will take, the source said. Those could include mortgage modifications or principal forgiveness.
A Justice Department spokesman declined to comment Thursday. Bank of America spokesman Lawrence Grayson also declined to comment.
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The settlement remains tentative, and if it falls apart the Justice Department is expected to sue the bank. It is unclear when a settlement might be announced or a lawsuit might be filed.
As negotiations between the parties continue, critics of the proposed deal have already emerged.
In a statement issued Thursday, Boston-based Neighborhood Assistance Corp. of America was skeptical that the settlement would go far enough to help consumers.
“If past settlements are any reflection on the Bank of America settlement, it will provide little if any real help to stabilize and increase homeownership,” the statement said.
Bruce Marks, CEO of the consumer advocacy group, argues that any Bank of America settlement should go entirely to consumers – instead of a portion going to the government as a penalty.
“None of this money should go to the general purposes of the government,” he said. “It should go to homeowners and homebuyers.”
Consumer relief in such deals can take various forms. The consumer relief in the $7 billion Citigroup settlement announced in July included financing affordable rental housing in high-cost areas. JPMorgan’s $13 billion deal announced in November includes principal forgiveness, loan modification and efforts to reduce blight.
If the Justice Department settles with Bank of America, the two sides would likely agree on a monitor who would be appointed to ensure the bank complies with its consumer relief requirements. Such third-party monitors have been appointed to oversee the Citigroup and JPMorgan settlements. Joseph Smith, former North Carolina banking regulator, is overseeing JPMorgan’s compliance.
It is not clear who will oversee any settlement with Bank of America.
The Bank of America settlement is expected to resolve federal and state probes into the sale to investors of securities backed by shoddy home loans that fueled the financial crisis. It would come after the bank has already spent more than $60 billion to resolve crisis-era legal issues, more than any other lender to resolve similar matters. It would be the biggest civil settlement between the U.S. government and a company.
Bank of America executives have said the settlement would resolve the largest outstanding legal issue it faces since the crisis, marking a milestone in its efforts to put costly legal issues behind it.
Past government settlements with banks have met criticism that they did too little to help consumers and that distribution of relief payments hasn’t gone smoothly.
Some people reported that checks they were sent last year under a settlement reached in 2011 with roughly a dozen major banks bounced when they tried to cash them. The settlement stemmed from allegations of robo-signing and other shoddy mortgage-servicing practices.
Marks, of NACA, said past settlements have awarded banks credit for steps – such as short sales – that resulted in people losing their homes.
His organization says it would have preferred more principal write-downs, assistance in bringing overdue loans current, and offers of affordable mortgages for low- and middle-income borrowers.
“The effect of government policy has been foreclosing on millions of homeowners,” Marks said. Those millions of foreclosures have been the result of both failed mortgage-modification efforts as part of the federal government’s crisis-era bailout as well as post-crisis settlements with lenders, he said.
Bank of America was one of five mortgage servicers that entered into a landmark, $25 billion national mortgage settlement with state attorneys general and federal agencies in 2012. Smith, the settlement’s watchdog, announced in March that all the mortgage servicers had satisfied their consumer relief and refinancing relief obligations.
In theory, it could take years for Bank of America’s consumer relief to reach homeowners and borrowers under a Justice Department settlement.
JPMorgan and Citigroup each have about four years to fulfill their consumer relief requirements.