Bank of America's headquarters are shown in Charlotte, N.C.Chuck Burton/The Associated Press
Big U.S. banks in talks with state prosecutors to settle claims of improper mortgage practices have been offered a deal that is proposed to limit part of their legal liability in return for a multibillion-dollar payment.
The talks aim to settle allegations that banks including Bank of America , JPMorgan Chase , Wells Fargo , Citigroup and Ally Financial seized the homes of delinquent borrowers and broke state laws by employing so-called "robosigners", workers who signed off on foreclosure documents en masse without reviewing the paperwork.
State prosecutors have proposed language that might release the companies from legal liability for wrongful securitization practices, according to five people with direct knowledge of the discussions.
Some state officials have expressed concern that they have offered the banks far too broad a release from liability. Others say the broad language was perhaps inadvertently crafted and will be tightened as negotiations continue. Participants on both sides stressed the talks remain fluid.
However, the banks – some of whose share prices have been battered by concern about their exposure to mortgage-related litigation – are pressing for immunity from a raft of alleged civil violations and have called the latest proposal a "non-starter".
They say the proposals from state prosecutors will need to be expanded before striking a deal, which is expected to involve a total penalty of $10-billion to $25-billion.
The two sides will meet again this week to iron out their differences. They are close to an agreement on future standards governing the servicing of home loans, yet remain far apart on other issues, such as legal liability claims, compliance and enforcement, and the amount of cash it will take to settle the allegations.
Bank stocks, which have been hammered in recent months, might be boosted by a settlement agreement if investors see it as the beginning of the end to a suffocating amount of mortgage-related litigation and the accompanying exposure to billions of dollars in losses.
BofA, which is perhaps the most exposed due to its ill-fated 2008 acquisition of troubled mortgage lender Countrywide Financial, has seen its shares plummet 49 per cent over the past six months.
Certain federal and state agencies are using the settlement discussions as a way to heal the deteriorating housing market and secure fresh debt relief for distressed homeowners. Some officials involved in the discussions have criticized this approach, pointing out that the government is attempting to resolve allegations it has not fully investigated. The talks began near the start of the year.
The worry over the states' counterproposal stems from its treatment of loan documents. The term sheet proposes to release the banks from legal liability over how mortgage documents were maintained, prepared and transferred, people familiar with the matter said.
Though the counteroffer attempts to release the banks from liability with respect to home repossessions, and explicitly states that the release does not include securitisation claims, the language is broad enough in that it could prevent state officials from bringing securitization claims in the future should they sign up to the agreement.
At the heart of securitization claims, which involve missteps in how home mortgages were bundled into bonds, are allegations that the banks did not properly maintain and transfer documents from one step in the complicated chain to the next.
If banks are released from liability regarding documentation practices, some industry officials believe they would be able to evade state lawsuits directed at how they bundled the loans into securities.
The attorneys-general of New York, Delaware, Massachusetts and Nevada are probing such securitization matters, and have already indicated to the other states that they did not agree with the counterproposal.
Catherine Cortez Masto, Nevada's legal officer, last week charged Bank of America's Countrywide unit with failing to properly transfer mortgages into the trusts that issued securities to investors, and for fraudulently pursuing home seizures anyway. New York's Eric Schneiderman has indicated his office has reached similar findings.