March 9 (Bloomberg) -- U.S. House Republicans criticized a proposed federal-state settlement of flawed foreclosure practices and questioned whether the Consumer Financial Protection Bureau has authority to participate in the talks.
“The settlement agreement not only legislates new standards and practices for the servicing industry, it also resuscitates programs and policies that have not worked or that Congress has explicitly rejected,” the lawmakers wrote in a letter dated today to Treasury Secretary Timothy F. Geithner.
State attorneys general and a federal task force have been investigating flawed paperwork and improper procedures in foreclosures. Officials have been negotiating a settlement with the top mortgage servicers, including Bank of America Corp., JPMorgan Chase & Co., Citigroup Inc., Wells Fargo & Co. and Ally Financial Inc.
State and federal officials gave the firms a 27-page settlement “term sheet” last week outlining future rules on mortgage servicing and conditions for possible loan modifications. They had previously floated the idea of a $20 billion penalty as part of any deal.
The letter, written by Representative Scott Garrett of New Jersey, took specific aim at the consumer bureau, which is scheduled to officially begin work on July 21. Elizabeth Warren, the Treasury and White House adviser charged with setting it up, got the job in September after Christopher Dodd, then head of the Senate Banking Committee, said she couldn’t win the necessary votes for confirmation as its formal director.
In today’s letter, the lawmakers said that since it “does not yet have any regulatory or enforcement authority” the consumer bureau’s role in servicing talks raises “further questions about the process through which the terms of the settlement are being negotiated.”
Garrett, who heads the Financial Services subcommittee on capital markets and the government-sponsored enterprises, was joined by Spencer Bachus of Alabama, the committee’s chairman; Randy Neugebauer of Texas, chairman of the subcommittee on oversight and investigations; and Patrick McHenry of North Carolina, who heads the finance subcommittee of the House Government Oversight Committee.
In a separate statement, Senator Richard Shelby criticized the proposed settlement as “nothing less than a regulatory shakedown” by the consumer bureau, the Federal Deposit Insurance Corp., the Federal Reserve and “some attorneys general, and the Administration, led by Elizabeth Warren.”
“I am also requesting that the Administration and our financial regulators refrain from entering into any settlement agreement until Congress has had an opportunity to conduct appropriate oversight on this matter,” wrote Shelby, of Alabama, the ranking Republican on the Banking Committee.
Ira Rheingold, the executive director of the National Association of Consumer Advocates, said that the Republican statements reflected the desire of banks who “just want to kill” the consumer bureau.
“The banks have gathered their forces and gotten their Republican friends in Congress to attack this offer,” Rheingold said in an interview.
The Independent Community Bankers of America said in a statement the group opposes the settlement’s proposal on reducing loan principal because it would be “opening a back door to cramdown.” Cramdown is a term used to describe a forced reduction in mortgage balances. In 2009, Congress rejected legislation that would have allowed bankruptcy judges to impose such reductions.
Jennifer Howard, a spokeswoman for the consumer bureau, declined to comment on the Republican statements. Colleen Murray, a spokeswoman for the Treasury, said that the “mortgage system we have to today is broken and we should work together to establish a stronger set of standards and best practices.”
Tom Miller, the Iowa attorney general who is leading the servicing talks for the states, said on March 8 that the CFPB should take the lead in enforcing any settlement since it will have jurisdiction over mortgages.
“It makes a lot more sense to have them enforce it from the beginning,” Miller, a Democrat, told reporters in Washington.
If it turns out that the CFPB doesn’t have “direct authority” in federal law to negotiate a settlement, it could codify the deal in a new regulation when it begins official operations in July, Miller said.
Greg Zoeller, the Republican attorney general of Indiana, who opposed the bureau’s creation, said the consumer bureau should “circle back and codify” any legal deal with mortgage servicers.
“The concern I have is that you skip the regulatory process” by negotiating a settlement directly with the banks, Zoeller said in a March 8 interview.
State attorneys general of both parties have embraced the CFPB and Warren as a player in the talks, both because it could enforce the deal, and because Warren is a useful point of contact for them, said Roy Cooper, the attorney general of North Carolina.
“I think there’s a pretty strong feeling that we need to work with the bureau,” Cooper, a Democrat, said in an interview. “It’s a fact of life.”
In the letter to Geithner, the Republicans demanded answers to a list of questions on the specific legal authority that the federal government has to negotiate the settlement, and the role of “persons associated with the CFPB” in the talks.
They also asked about the legal basis for using money from a settlement to fund principal reductions in mortgages, and how a deal would affect “the safety and soundness” of firms covered by it.
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