An enforcement action against a bank is almost always bad news for the institution involved. But a federal bank regulators' order released Wednesday against the top 14 mortgage servicers was likely to help, not hurt, the banks, providing them with added leverage as they attempt to negotiate a separate settlement with the 50 state attorneys general and several federal agencies.
While the order requires the servicers to overhaul their operations, it also bolsters a key bank defense — namely, that the significant problems uncovered in the process have not led to improper foreclosures. It also allows banks to argue that the banking agencies have already addressed many of the issues that the state AGs would like to see resolved.
"It will work in the banks' favor," said Paul Miller, managing director of FBR Capital Markets Corp. "It's a good way to say to the attorneys general, 'The federal banking agencies have it handled.' "
The order was quickly seized on by both sides, with lawmakers who want to see tougher actions calling it weak and ineffective, while banking industry representatives said it appropriately dealt with problems.
The state AGs and Obama administration officials, meanwhile, praised the order but insisted their negotiations were not undercut by it.
"We don't agree with that," said Tom Perrelli, an associate attorney general at the Justice Department, in a conference call with reporters.
Perrelli emphasized that the agencies have yet to assess monetary penalties — although even bank regulators have said they are necessary — and said certain areas, including federal trade and bankruptcy provisions, were not covered by the order released Wednesday.
"We are negotiating directly with servicers" so "that those action plans fully satisfy the state AGs as well as the other federal enforcers," Perrelli said. "We're working with the servicers on how they will address the subset of issues in the federal orders as well as a broader set of issues."
Although a monetary penalty was not included in the order, the Federal Reserve Board and other federal officials made it clear one is in the offing.
"We have capacity to levy substantial fines which could be used for a variety" of measures, said Helen Kanovsky, the general counsel of the Department of Housing and Urban Development, on the conference call.
