Bank of America Corp. and Wells Fargo & Co. could face million-dollar fines if more than 1 percent of their foreclosure sales are found to be in error going forward, according to legal documents outlining the $25 billion mortgage settlement.
The terms of last month’s blockbuster agreement with state and federal authorities, filed in federal court on Monday, lay out benchmarks the country’s five largest mortgage servicers will have to meet in their mortgage servicing and loan modifications.
Banks will risk penalties if they deny loan modifications in error more than 5 percent of the time. They must also respond to customer complaints within 30 days more than 95 percent of the time.
If banks violate the terms and do not move to fix the problems, settlement monitor Joseph Smith, the former N.C. banking commissioner, can levy fines of $1 million per violation. The fine goes to $5 million for any benchmark that continues not to be met after the initial fine.
The banks involved do not admit wrongdoing in the settlement, which comes after more than a yearlong investigation sparked by allegations that banks had been foreclosing on homes using documents that mortgage servicers had not fully read.
The settlement must still be approved by a judge, the U.S. Department of Justice said. Of the $25 billion sum, Charlotte-based Bank of America will be responsible for the largest share, $11.8 billion. Wells Fargo’s share is $5.3 billion.
In the settlement, federal authorities outline their case against the banks, alleging improper mortgage originations, unauthorized foreclosures, the use of “false and deceptive” affidavits and other legal documents, and the “waste and abuse” of taxpayer money.
Within a week after the settlement becomes effective, Bank of America will have to put about $2.4 billion into an escrow account. Wells Fargo will put in about $1 billion.
All told, the escrow account will hold about $5 billion of the $25 billion to be paid out in the settlement. Money from the escrow account will be distributed to state governments and to about 750,000 families who lost their homes to foreclosure.
Here’s how the rest of the $25 billion breaks down: A collective $10 billion will go toward principal reduction for underwater homeowners in default or at risk of default. About $7 billion will go to other forms of foreclosure relief, such as short sales. Another $3 billion will help underwater borrowers current on their payments to refinance at lower rates.
A home is “underwater” when the owner owes more than the home is worth. Critics have pointed out that the settlement will barely make a dent in the total negative equity around the country, estimated at $700 billion by research firm CoreLogic.
Bank of America officials did not offer any additional comment Monday, but bank officials referred to the statement they made when the settlement was announced Feb. 9. The bank said then that it believes the settlement will provide more help to homeowners and certainty to the housing market.
Bank of America and Wells Fargo have both said they have set aside money to cover their portions of the settlement.
Under the direction of Smith, the former banking commissioner and monitor of the settlement, each bank will put together an internal work group to review its progress each quarter. The banks will have to conduct reviews of their affidavits and other documents in foreclosure and bankruptcy proceedings at least quarterly to make sure they are accurate and comply with the settlement.
A report will be issued to the monitor every quarter outlining each bank’s overall progress, as well as a report to each state regarding the bank’s activity there.
The settlement also contains a new slate of servicing standards, including billing-dispute procedures that will allow homeowners to better track complaints.
One of them requires banks to consider a homeowner for all foreclosure prevention programs they are eligible for before beginning the foreclosure process. The homeowner will then be able to appeal those decisions and have their situation reviewed by a third party.
The banks will also have to come up with procedures to keep foreclosed properties from falling into disrepair.
The agreement specifies that it does not absolve the banks of all legal liability. They will still be open to criminal prosecution, and homeowners will be able to pursue individual claims.
But it does resolve a number of state-level suits. The office of the U.S. Attorney for the Western District of North Carolina announced Monday that, as part of the larger settlement, it had reached a $95 million agreement with the five banks to resolve claims that the banks filed false information in courts in Charlotte and Columbia.
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