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» Do US Banks Deserve Deal in Robo-signing Lawsuits?

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Robo-signer

Robo-signer

In recent years, waves of home foreclosures have swept the United States. These foreclosures, and the collapse of mortgage-backed securities that follows, continue to impact the US economy.  There is an ongoing focus into the legitimacy of the foreclosures across the nation, driven in part by the controversial practice of “robo-signing”.

Robo-signing refers to bank officials who approve documents during loan origination, debt collection, and foreclosure proceedings without reviewing them to ensure accuracy. This can lead to improper loans being made, debt collection activities against people who do not owe anything, and in worst case, a foreclosure filing that is not justified. The practice is not legal.

After a rash of complaints and a groundswell of pending lawsuits, large companies such as Bank of America have stated that robo-signing is no longer in practice. However, Bank of America and some other companies have been found still employing this illegal practice well into 2011.

The latest news on this topic is the discussion between the US government and some of the biggest banks (Bank of America, JP Morgan Chase, Wells Fargo, Citigroup, and Ally Financial) to reach a legal settlement on the issue. The banks are negotiating a penalty payment to avoid further prosecution, and the deal will include a release of liability for future prosecution. Details are not agreed yet on how far the release in liability will go. The government wants to limit the release to improper foreclosures, with the possibility of improper securitization liability waived as well. The banks would like to push this farther, and to include protection from civil claims in the agreement.

PRO

A convincing argument can be made to allow a settlement. The bailout packages for the banks have cost the federal government dearly, and the penalty in discussion would cover $10 to $25 billion dollars. A quick agreement on the penalty and the liability limits would also reduce the ongoing costs to taxpayers of funding an investigation and a lengthy trial process.

Continued scrutiny and an ongoing investigation into the banks will do nothing to relieve the downward pressure on stock prices. Bank of America’s stock has lost nearly 50% of its share price so far. Putting an end to the investigation may allow the banks to rebuild, supporting the investors and permitting financial recovery in the sector.

Finally, putting additional pressure on the banks and driving to recover every penny may have an unintended side effect.  If the penalties and costs associated with them are too severe, this could restart the cycle of bank failure threats from 2008 and 2009. This benefits no one.

CON

Against the compromise is the fact that the banks broke the law. Allowing the payment of a penalty will carry the appearance of purchased justice, while a full investigation into the practice could reveal pervasive activities impacting ongoing foreclosures and other banking practices. A full investigation would further ensure that much stronger regulatory controls are in place and more closely monitored in the future by government officials.

The current wording of the offers from state government officials is quite vague, and there is growing concern that the terms would allow future immunity from lawsuits. The intention today is to close out the robo-signing issue as regards improper foreclosure, but the wording can be used to also evade lawsuits for improper securitization in the future. The allegation here is that by the same lack of due process on documentation, the banks originated mortgage-backed securities that were not robust, then packaged them into bonds and sold them, leading to the recent problems.

Additionally, the banks are seeking protection from civil claims as part of the arrangement. This means that the government will abrogate not only the criminal charges that it could bring, but may also elect to grant immunity from lawsuits by individuals. This severely limits the legal recourse of families who may have lost their homes without due process.

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