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From Banking and Finance Law Daily, February 13, 2015

House investigates whether mortgage lending settlement donations benefit homeowners or nonprofits

By Colleen M. Svelnis, J.D.

The House Judiciary Subcommittee on Regulatory Reform, Commercial and Antitrust Law has opened a “pattern or practice” investigation into the Justice Department’s mortgage lending settlements. The Feb. 12, 2015, hearing, “Consumers Shortchanged? Oversight of the Justice Department’s Mortgage Lending Settlements,” took a closer look at the federal-state task force settlements with Citigroup, Bank of America, and J.P.Morgan.

The settlement with JP Morgan offered credit for donations to community redevelopment groups. The Citigroup and Bank of America settlements went further and required $150 million in donations to housing non-profits. At issue is whether the settlements provide financial relief to homeowners who were harmed, as intended, or whether the money is instead going to “politically powerful activist groups.” The hearing also took a closer look at the groups that will receive money from the settlements.

Activist groups. Chairman Bob Goodlatte (R-Va) expressed concern that the Department of Justice may be systematically subverting Congress’s budget authority by using settlements to “funnel money to activist groups.” Goodlatte also said that Bank of America must set aside $490 million to pay potential consumer tax liability arising from loan modifications, but if it is not needed, instead of reverting to the bank, the money would go to nonprofit groups. Goodlatte stated that the “DOJ has directed as much as half a billion dollars to activist groups entirely outside of the Congressional budget and oversight process.”

Goodlatte declared that “the purpose of enforcement actions is punishment and redress to actual victims. Carrying that concept to communities at large or activist community groups, however worthy, is a matter for the Legislative Branch and is not to be conducted at the unilateral discretion of the Executive.”

Witch hunt. Ranking Member John Conyers, Jr. (D-Mich) responded by calling the hearing “a misguided witch hunt that has absolutely nothing to do with helping the millions of hardworking Americans who were swindled by unscrupulous and predatory mortgage lenders and mortgage servicers.”

“Nor does it have anything to do with addressing the massive fraud committed by the securities industry that nearly led to the financial collapse of our Nation’s economy,” he continued.

Task force Director. In his testimony, Geoffrey Graber, Deputy Associate Attorney General and Director of the RMBS Working Group of the Financial Fraud Enforcement Task Force, U.S. Department of Justice, said that the goal behind the settlements was to make financial institutions accountable for engaging in wrongdoing relating to residential mortgage-backed securities, as well as to bring some measure of relief to homeowners who suffered as a result of the financial crisis. He testified that each settlement did this by requiring a significant monetary penalty, as well as a statement of facts acknowledging the evidence underlying the government’s allegations. Each bank also committed to provide billions of dollars of consumer relief to help homeowners keep their homes or to secure homeownership for the first time.

Graber noted that the Justice Department does not have control over how the banks choose to complete their consumer relief obligations within the parameters set forth in the settlement agreements. It is up to the banks to choose exactly how they fulfill their obligations.

Conflict of interest in settlements. Ted Frank, founder of the Center for Class Action Fairness, said, “when public enforcers are permitted to use settlements to structure public policy or divert settlement money to third parties, it reintroduces the conflict-of-interest problem into the mix.”

Frank stated that when the “Justice Department negotiates settlements that send money to third parties instead of to the United States Treasury or to the primary victims of the challenged conduct without legislative authority, they violate separation of powers by effectively using executive-branch enforcement authority to create legislative spending power.” He continued, “The spending may evade laws and regulations limiting or controlling federal spending, or create or fund programs that Congress never would have agreed to spend. The settlement further meddles in public policy in counterproductive and unfair ways that will ultimately result in making many consumers worse off.”

Congressional authorization necessary. Paul Larkin, Senior Legal Research Fellow at the Heritage Foundation, testified that in his opinion “third party payment requirements should not be included in a plea bargain, civil settlement, and nonprosecution or deferred prosecution agreement unless an act of Congress expressly and specifically authorizes the government to impose any such obligation.” He said this is true because:

  1. The Justice Department lacks the statutory authority to hand over government funds to parties of its own choosing.

  2. The practice of required third-party contributions is inconsistent with the federal laws that supply financial assistance to the victims of crime.

  3. Third party contribution requirements circumvent the constitutional process for appropriating taxpayer dollars.

  4. The practice denies the public the opportunity to know how public funds are spent and to hold elected officials accountable for their choices because it enables Representatives and Senators to shirk their fiscal responsibilities.

  5. Third-party contribution requirements are rife with opportunities for political cronyism because they allow the Justice Department to pick-and-choose among private organizations as to which ones will receive federal funds without any guidance from Congress or any oversight by the Judiciary or Appropriations Committees in each chamber.

  6. Third-party contribution requirements are not necessary for plea bargains, civil settlements, and nonprosecution or deferred prosecution agreements to work as a means of disposing of criminal or civil cases

Banks not compelled. Alan M. White, Professor at CUNY School of Law, said in his testimony that the settlements with Citigroup, J.P. Morgan, and Bank of America do not compel the banks to fund activist groups, or to divert large sums from consumer relief for that purpose. Instead he said:

  • it is entirely up to the banks which legal aid agencies and housing counselors to fund;

  • there are hundreds of housing counselors and legal aid agencies to choose from, including faith-based organizations and nonpartisan community development groups whose political orientations range from left to centrist to nonpartisan to right;

  • if a bank sees a particular nonprofit agency as too controversial, because of the work that agency does with its other funding, the bank can simply leave the group off of its donation list;

  • less than one percent of the consumer relief dollars in these settlements is earmarked for housing counselors and legal aid; and

  • the nonprofit legal aid and housing counseling agencies are all subject to auditing and oversight that prevents misuse of public and private funds for political activity of any kind.

Closer look at nonprofit. Cornelia Mrose, CEO of Compass Films of New York LLC, which was founded in September 2014 to make a documentary film about the financial crisis, spoke about an organization that could receive settlement funds, NeighborWorks Orange County. Employees of the nonprofit organization navigate federal and state programs such as Making Home Affordable, The Home Affordable Refinance Program, or Keep Your Home California, a program of the CalHFA Mortgage Assistance Corporation. The group also has access to down payment assistance programs.

In 2012, the nonprofit group received $212 million from government grants for housing counselling, neighborhood stabilization, community development, and foreclosure prevention, according to Mrose. The organization also gives out grants to its 240 chartered members. Mrose said that, in 2012, NeighborWorks Orange County also received $135,000 from private enterprises, mostly banks. She stated that 3.4 percent of the organization’s money came from private business and 94.6 percent from taxpayers.

In 2012, $1.8 million was paid to the group’s 26 employees. Mrose noted that that is an average salary of about $80,000 per employee. Additionally, she said that more than $200,000 was given as grants to other activist groups.

Companies: Bank of America; Center for Class Action Fairness; Citigroup; Compass Films of New York LLC; Heritage Foundation; J.P. Morgan

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