Major Banks Close to 10 Billion Settlement on Past Abuses in Home Loans

U.S. regulators are close to securing a 10 billion-dollar settlement with 14 banks to resolve allegations that they unlawfully cut corners when foreclosing on delinquent borrowers, a source familiar with the talks said.

Such a settlement would address an outstanding issue that was left unsettled after the $25 billion deal that the banks reached in February with the Justice Department, housing authorities, and state attorneys general.

In 2011, the OCC had separately required the big banks to "look back" and compensate borrowers wrongfully foreclosed upon in 2009 and 2010. It appears that the case-by-case analysis is proving too cumbersome, and the banks are instead opting for a lump-sum settlement. Under the terms of the order, the 14 banks had to hire independent consultants to pore through the loan records to determine whether the banks illegally charged fees, forced homeowners to take out costly insurance or miscalculated loan payment amounts. Consultants initially estimated that each loan would take about eight hours, at a cost of up to $250 an hour, to go through.

The costs of the reviews have ballooned, though, according to people with knowledge of the reviews, in part because each loan file is taking up to 20 hours to review. Since its inception, the reviews have cost the banks about $1.5 billion, according to those people.

Pressure to reach a settlement with the banks has been building, particularly within the Office of the Comptroller of the Currency, amid widespread frustration that the banks’ mandatory review of loan files was arduous and expensive, and would not yield promised relief to homeowners, according to five former and current banking regulators.

The largest banks would pay the majority of the $10 billion target. That money would be paid out to a group of borrowers foreclosed upon during the period of time covered by the review, said the source, who was not authorized to speak publicly.

The OCC and the banks are still negotiating how to calculate individual payouts, the source said, adding that regulators will give the banks credit for compensation they have already given borrowers as part of ongoing foreclosure reviews.