by Ben Vernia | June 17th, 2014
On June 17, the Department of Justice announced that the United States, along with state attorneys general, had reached an agreement to settle allegations of fraud in mortgage origination against SunTrust Mortgage, Inc., for $1 billion. Of that sum, the government described $418 million as payment for False Claims Act violations. According to DOJ’s press release:
The Justice Department, Department of Housing and Urban Development (HUD), and the Consumer Financial Protection Bureau (CFPB), along with 49 state attorneys general and the District of Columbia’s attorney general have reached a $968 million agreement with SunTrust Mortgage Inc. (SunTrust) to address mortgage origination, servicing, and foreclosure abuses.
The joint agreement is the result of extensive investigations by federal agencies, including the Department of Justice, HUD and the HUD Office of the Inspector General (HUD-OIG), CFPB and state attorneys general across the country, and includes recoveries for both improper mortgage origination and servicing practices.
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As part of the settlement, SunTrust has agreed to pay $418 million to resolve its potential liability under the federal False Claims Act for originating and underwriting loans that violated its obligations as a participant in the Federal Housing Administration (FHA) insurance program. As a participant in that program, SunTrust had the authority to originate, underwrite and certify mortgages for FHA insurance.
SunTrust admitted that between January 2006 and March 2012, it originated and underwrote FHA-insured mortgages that did not meet FHA requirements, that it failed to carry out an effective quality control program to identify non-compliant loans, and that it failed to self-report to HUD even the defective loans it did identify. SunTrust also admitted that numerous audits and other documents disseminated to its management between 2009 and 2012 described significant flaws and inadequacies in SunTrust’s origination, underwriting, and quality control processes, and notified SunTrust management that as many as 50 percent or more of SunTrust’s FHA-insured mortgages did not comply with FHA requirements. For example, a 2012 internal SunTrust document noted two “significant” issues that had been plaguing the company for years – a “Broken Loan Origination Process” coupled with a “Deficient Government Insuring Process.” Other reports received by SunTrust management described its quality control program as “severely flawed” and “ineffective.” These reports described to management that the volume of problems in the program was “excessive,” and that the error rates were “elevated” and at an “unacceptable level.”
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The servicing portion of the agreement parallels the $25 billion National Mortgage Settlement (NMS) reached in February 2012 between the federal government, 49 state attorneys general and the District of Columbia’s attorney general and the five largest national mortgage servicers. Under the agreement announced today, SunTrust has agreed to provide $500 million in additional relief in the next three years directly to borrowers and homeowners in the form of reducing the principal on mortgages for borrowers who are at risk of default, reducing mortgage interest rates for homeowners who are current but underwater on their mortgages, and other relief. The settlement will likely provide direct benefits to borrowers far in excess of $500 million because SunTrust will not be permitted to claim credit for every dollar spent on the required consumer relief. SunTrust has also agreed to pay $50 million in cash to redress its servicing practices, $40 million of which will be distributed to borrowers and homeowners through the Borrower Payment Fund established by the NMS and administered by the states.
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The joint federal-state agreement also requires SunTrust to implement significant changes in how they service mortgage loans, handle foreclosures, and ensure the accuracy of information provided in federal bankruptcy court. The agreement requires new servicing standards which will prevent foreclosure abuses of the past, such as robo-signing, improper documentation and lost paperwork, and create dozens of new consumer protections. The new standards provide for strict oversight of foreclosure processing, including third-party vendors, and new requirements to undertake pre-filing reviews of certain documents filed in bankruptcy court.
The new servicing standards ensure that foreclosure is a last resort by requiring SunTrust to evaluate homeowners for other loss mitigation options first. In addition, SunTrust is restricted from foreclosing while the homeowner is being considered for a loan modification. The new standards also include procedures and timelines for reviewing loan modification applications and give homeowners the right to appeal denials. SunTrust will also be required to simplify the process for homeowners needing help by creating a single point of contact for borrowers seeking information about their loans and—importantly—maintaining adequate staff to handle calls.
The agreement will be filed as a consent judgment in the U.S. District Court for the District of Columbia. Compliance with the agreement will be overseen by an independent monitor, Joseph A. Smith Jr., who is also the monitor for the NMS. Smith has served as the North Carolina Commissioner of Banks since 2002, and is also the former Chairman of the Conference of State Banks Supervisors (CSBS). The monitor will oversee implementation of the servicing standards required by the agreement; impose penalties of up to $1 million per violation (or up to $5 million for certain repeat violations); and publish regular public reports that identify any quarter in which a servicer fell short of the standards imposed in the settlement.
The agreement resolves potential violations of civil law based on SunTrust’s deficient mortgage loan origination and servicing activities. The agreement does not prevent state and federal authorities from pursuing criminal enforcement actions related to this or other conduct by SunTrust, or from punishing wrongful securitization conduct that is the focus of the Residential Mortgage-Backed Securities Working Group of President Barack Obama’s Financial Fraud Enforcement Task Force. The agreement does not prevent the CFPB from pursing civil enforcement actions against SunTrust for violations of the CFPB’s new mortgage servicing rules that took effect on Jan. 10, 2014. State attorneys general also preserved, among other things, all claims against the Mortgage Electronic Registration Systems (MERS), and all claims brought by borrowers. Additionally, the agreement does not prevent any action by individual borrowers who wish to bring their own lawsuits.