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From Banking and Finance Law Daily, June 18, 2014

SunTrust Mortgage to pay nearly $1 billion in massive federal-state mortgage misconduct crackdown

By Katalina M. Bianco, J.D.

A team of federal agencies partnered with 49 state attorneys general, plus the District of Columbia AG, to take action against SunTrust Mortgage, Inc. for mortgage origination, servicing, and foreclosure abuses. The federal agencies—the Consumer Financial Protection Bureau, Department of Justice, and Department of Housing and Urban Development—in conjunction with the state AGs have filed a proposed federal court order requiring SunTrust to pay a total of $968 million in penalties.

The settlement is the result of an investigation conducted by the federal agencies and state AGs. The Treasury Department, Federal Trade Commission, Federal Deposit Insurance Corporation, Department of Veterans Affairs, and U.S. Department of Agriculture also contributed to the investigation. The joint federal-state agreement is part of enforcement efforts by President Obama’s Financial Fraud Enforcement Task Force, which includes representatives from a broad range of federal agencies, regulatory authorities, inspectors general, and state and local law enforcement.

“SunTrust’s conduct is a prime example of the widespread underwriting failures that helped bring about the financial crisis,” Attorney General Eric Holder said. “From mortgage origination to servicing to securitization, the Department of Justice is attacking every facet of conduct that led to the Great Recession. We will continue to hold accountable financial institutions that, in the pursuit of their own financial interests, misuse public funds and cause harm to hardworking Americans. We expect that there will be more cases like this to come.”

“Deceptive and illegal mortgage servicing practices have pushed families into foreclosure and devastated communities across the nation,” said CFPB Director Richard Cordray. “Today’s action will help homeowners and consumers harmed by SunTrust’s unlawful foreclosure practices. The Consumer Bureau will continue to investigate mortgage servicers that mistreat consumers, and we will not hesitate to take action against any company that violates our new servicing rules.”

SunTrust admissions. SunTrust is a mortgage lender and servicer headquartered in Richmond, Va., and is a wholly-owned subsidiary of SunTrust Banks Inc., a bank and financial services company headquartered in Atlanta, Ga. According to Holder, SunTrust admitted that between January 2006 and March 2012, it originated and underwrote Federal Housing Administration-insured mortgages that did not meet FHA requirements. SunTrust also admitted that the company failed to carry out an effective quality control program to identify non-compliant loans and failed to self-report to HUD the defective loans it did identify.

According to the DOJ, numerous audits and other documents disseminated to SunTrust management between 2009 and 2012 described significant flaws and inadequacies in SunTrust’s origination, underwriting, and quality control processes. SunTrust management was notified that as many as 50 percent or more of SunTrust’s FHA-insured mortgages did not comply with FHA requirements, and reports received by SunTrust management described the lender’s 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.”

Complaint. According to the complaint filed in the federal district court in the District of Columbia, SunTrust’s illegal practices put thousands of people at risk of losing their homes. The complaint alleges that SunTrust violated, among other laws, state Unfair and Deceptive Acts and Practices laws, the Consumer Financial Protection Act of 2010, the False Claims Act, the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, the Bankruptcy Code, and the Federal Rules of Bankruptcy Procedure. Specifically, SunTrust is charged with:

  • failing to promptly and accurately apply payments made by borrowers and charging unauthorized fees for default-related services;

  • failing to provide accurate information about loan modification and other loss-mitigation services;

  • failing to properly process borrowers’ applications and calculate their eligibility for loan modifications;

  • providing false or misleading reasons for denying loan modifications;

  • providing false or misleading information to consumers about the status of foreclosure proceedings when the borrower was in good faith actively pursuing a loss mitigation alternative also offered by SunTrust; and

  • robo-signing foreclosure documents, including preparing and filing affidavits whose signers had not actually reviewed any information to verify the claims.

Proposed court order. The proposed court order would require SunTrust to correct its practices and provide relief to harmed consumers. Under the terms of the order, SunTrust must:

  • provide at least $500 million in loss mitigation relief to underwater borrowers over a period of three years, including reducing the principal on mortgages for borrowers who are at risk of default and reducing mortgage interest rates for homeowners who are current but underwater on their mortgages. Should SunTrust fail to meet this requirement, it must pay a cash penalty equal to at least 125 percent of the shortfall;

  • refund $40 million to consumers whose loans it serviced who lost their homes to foreclosure between Jan. 1, 2008, and Dec. 31, 2013. All consumers who submit valid claims will receive an equal share of the $40 million. Borrowers who receive payments will not have to release any claims and will be free to seek additional relief in the courts. Eligible consumers can expect to hear from the settlement administrator about potential payments later this year;

  • pay $10 million to cover losses it caused to the FHA, Department of Veterans Affairs, and the Rural Housing Service; and

  • establish additional homeowner protections, including protections for consumers in bankruptcy. Like other servicers, SunTrust is subject to the CFPB’s new mortgage servicing rules that took effect on Jan. 10, 2014. The agreement only covers SunTrust’s violations before the new rules took effect and does not prevent the CFPB from pursuing civil enforcement actions against SunTrust for violations of these rules, according to the bureau.

SunTrust also will 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 FHA insurance program. As a participant in that program, SunTrust had the authority to originate, underwrite and certify mortgages for FHA insurance.

Consumer protections. The proposed order also creates a number of new consumer protections and standards, including:

  • making foreclosure a last resort by requiring SunTrust to evaluate homeowners for other loss mitigation options;

  • restricting foreclosure while the homeowner is being considered for a loan modification;

  • establishing new procedures and timelines for reviewing loan modification applications;

  • providing homeowners with the right to appeal denials of loan modification applications;

  • requiring a single point of contact for borrowers seeking information about their loans; and

  • requiring adequate staff to handle calls from homeowners.

Compliance with agreement. Compliance with the agreement will be overseen by an independent monitor, Joseph A. Smith Jr., who is also the monitor for the National Mortgage Settlement--the $25 settlement reached in February 2012 between the federal government, 49 state AGs, the District of Columbia’s AG, and the five largest national mortgage servicers. 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

SunTrust statement. William H. Rogers, Jr., chairman and chief executive officer of SunTrust Banks, Inc., said the company is “pleased to have resolved these legacy mortgage matters.” Rogers added, "Like most major financial institutions, we are addressing issues related to mortgage matters stemming from the financial crisis and recession period."

Companies: SunTrust Banks, Inc.; SunTrust Mortgage, Inc.

MainStory: TopStory CFPB CrimesOffenses DistrictofColumbiaNews EnforcementActions GeorgiaNews Loans Mortgages UDAAP VirginiaNews

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