Bank of America Settlements Impede Fraud Probe, Arizona Says

Bank of America Corp. is impeding an investigation of its loan modification practices by negotiating settlements with borrowers who must agree to keep them secret and not criticize the bank in exchange for cash payments and loan relief, Arizona officials say.

The Arizona Attorney General’s office is asking a court to block those aspects of the settlements and require the bank to turn over all the agreements. The bank denies any wrongdoing.

One 2011 accord involving a borrower facing foreclosure who defaulted on a $253,142 mortgage included a $5,000 payment, plus $7,500 for legal fees, and the defaulted payments were waived and the loan was modified to a 40-year term with a 2 percent interest rate, court documents show. The terms of the original loan and the borrower’s complaint about the lender weren’t described in the documents.

The borrower “will remove and delete any online statements regarding this dispute, including, without limitation, postings on Facebook, Twitter and similar websites,” and not make any statements “that defame, disparage or in any way criticize” the bank’s reputation, practices or conduct, according to documents filed in state court in Phoenix. The borrower’s name and address were redacted.

Non-Disparagement

Bank of America attorneys argue that borrowers don’t have to sign the agreements to get a loan modification and deny that settlements hinder the state’s probe. Borrowers can be subpoenaed to disclose the accords, and the Charlotte, North Carolina-based bank won’t enforce the non-disparagement provision if they talk to investigators, the bank’s lawyers have said in court filings.

A hearing is set for Feb. 1 on the dispute.

Arizona Attorney General Thomas Horne, a Republican who took office last January, is investigating Bank of America as part of a 2010 lawsuit alleging customers of its Countrywide Financial mortgage unit were misled about requirements for loan modifications. The bank, which acquired Calabasas, California- based Countrywide in 2008, provided inaccurate and deceptive reasons for denying modification applications, according to the the complaint. A similar suit was filed by Nevada.

The settlement agreements came to light as state investigators followed up on borrower complaints filed with the attorney general’s office. The office learned of 12 settlements while examining 1,900 complaints and when it attempted to contact the borrowers, Assistant Attorney General Carolyn Matthews said in Jan. 11 court filing.

Frequent Contact

Only four returned phone calls and none would provide a copy of the settlement, Matthews said. Some who signed the settlements had previously been in frequent contact with the attorney general’s office, according to court records.

Matthews contends that under the terms of the settlements, even if subpoenaed, borrowers can’t reveal any unflattering information about the bank. They couldn’t talk about misrepresentations the bank made about loan modifications, which is what the state is investigating, she said.

“These agreements have completely silenced even the most communicative consumers,” Matthews said in the filing. “The settlement agreement purposefully makes it impossible, legally and practically, for a consumer signing it to come forward, voluntarily and promptly, to provide evidence in this case.”

She asked a state judge to order Bank of America to notify borrowers who signed the agreements that they don’t have to adhere to the confidentiality and non-disparagement provisions.

Settlement Talks

Arizona has been participating in settlement negotiations between the five biggest U.S. mortgage servicers, including Bank of America, and state and federal officials to resolve a nationwide prove of foreclosure practices, Matthews said in an e-mail yesterday.

If Arizona joins any final settlement reached, that would affect the state’s lawsuit against Bank of America, she said.

“While Arizona is evaluating and is interested in the multistate settlement, Arizona will not join it unless we are able to simultaneously resolve our claims against Bank of America set forth in our separate lawsuit,” Matthews said.

Inappropriate Practices

Settlements with borrowers are more likely in cases in which the bank engaged in inappropriate practices, such as steering customers away from more affordable loans, or canceling a mortgage modification after a single payment went missing from a borrower who otherwise kept up with payments, said Patricia Garcia Duarte, chief executive officer of Neighborhood Housing Services of Phoenix Inc., which works with families facing foreclosure. Bank of America is a contributor to the organization, according to the group’s website.

Patricia Lee Refo, a Bank of America attorney, said in court filings that the confidentiality provisions are common in settlement agreements, which the bank uses on a “limited” basis to resolve disputes and avoid a costly lawsuit. There’s no policy to ask borrowers to sign settlement agreements in exchange for loan modifications, David Thornton, senior vice president for social media and urgent customer relations, said in a filing.

‘Extremely Serious’

“Plaintiff cannot ask this court enter the extremely serious finding that defendants have interfered with law enforcement based on one settlement agreement, or even 12, containing plain vanilla terms litigants use every day to resolve disputes,” Refo said in a court filing.

The bank can’t say how many settlements have been reached with Arizona customers because the agreements aren’t centrally stored on computers, Thornton said.

“We look at each situation on a case-by-case basis and decide what to do based on the specific situation,” Shirley Norton, a Bank of America spokeswoman, said in an e-mail.

Wells Fargo & Co., the biggest U.S. bank by market value and the largest mortgage lender, has a similar practice, said James Hines, a spokesman for the San Francisco-based bank.

“Each case is unique and for a variety of reasons we may elect to include a confidentiality and/or a non-disparagement agreement as part of the settlement,” Hines said in an e-mail. He said he didn’t know how many settlements had been reached.

Borrowers’ Boon

Loan modification settlements are a boon for borrowers struggling to keep their homes, Duarte said in a phone interview. Duarte said she doesn’t see many such settlements and that borrowers who sign one can’t talk about them.

“That shouldn’t apply to investigators like the attorney general,” she said.

Lump sum payments of thousands of dollars and provisions blocking borrowers from criticizing banks aren’t common, she said.

“Clearly the banks are freaking out, they are paranoid,” Duarte said. Bank of America “has the worst reputation because it’s so large. A lot of it isn’t their fault, it was Countrywide.”

The case is Arizona v. Countrywide Financial Corp. CV2010-033580, Arizona Superior Court, Maricopa County (Phoenix).

To contact the reporter on this story: Karen Gullo in San Francisco at kgullo@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

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