National Mortgage Settlement Doesn't Protect Against Future Fraud Charges, Banks Fear

Executives at some of the nation's largest banks could be slowing down the national settlement over allegations of widespread mortgage fraud, concerned that the deal won't offer sufficient cover from new fraud charges, said a source close to the negotiations. The deal would settle allegations that the banks forged documents and wrongfully foreclosed on borrowers in what has come to be known as the "robo-signing" scandal.

Bank concerns reached fever pitch on Friday when the New York State attorney general's office sued Bank of America, JP Morgan Chase and Wells Fargo, accusing the banks of deceptive and fraudulent use of a private database used to register mortgages.

"I think it's fair to say that the banks are becoming an obstacle to completing this settlement now," said the source, who spoke on condition of anonymity.

The settlement has become a political flashpoint as the presidential campaign heats up. The Obama administration is pushing for an agreement to present to voters as evidence the president is helping homeowners and getting tough on the big banks that helped spark the housing crisis. Some state attorneys general have been outspoken that the deal is too soft on the banks. These states, New York and California most notably, are also holding back a finalized deal.

Bank executives argue that New York attorney general Eric Schneiderman is using the lawsuit to go after claims already covered under the settlement, said the source. JP Morgan Chase, Ally Financial, Citigroup and Wells Fargo declined to comment. Bank of America could not be reached for comment.

Iowa attorney general Tom Miller said in a statement Monday night that more than 40 states have signed on to the settlement, which "enables us to move forward into the very final stages of the remaining work." Senior administration officials declined to comment.

A handful of state attorneys general are following the lead of California's attorney general, who has raised concerns that banks are getting off too easily with this settlement agreement. California, New York and these other states are working to secure additional aid for their hardest-hit residents and ensure that the banks are held accountable for their alleged fraud. These states have yet to join the deal.

"For the past 13 months we have been working for a resolution that brings real relief to the hardest-hit homeowners, is transparent about who benefits and will ensure accountability," said California attorney general Kamala Harris in a press statement. "We are closer now than we've ever been before but we're not there yet."

The five banks participating in the settlement -- Ally Financial, Citigroup, Bank of America, Wells Fargo, and JP Morgan Chase -- will contribute a total of $25 billion to help struggling homeowners if California joins the deal. Without California, that figure drops to $19 billion. To sweeten the deal, negotiators have guaranteed California billions of dollars in homeowner assistance, though there are conflicting reports that value the offer between $6 billion to $15 billion.

As states have learned of California's side deal, they have been sought to secure guarantees of their own. In a conference call on Saturday, Shaun Donovan, Secretary of the Department of Housing and Urban Development, confirmed that the administration has been speaking with a number of states about possible guarantees for their homeowners.

Florida -- another state hit hard by the foreclosure crisis -- has yet to join the settlement because it wants a side deal of its own, said a source close to the conversations.

Massachusetts, Nevada and Delaware have also resisted joining the settlement, say sources familiar with the negotiations who spoke on the condition of anonymity, because they share many of the same concerns as California, Florida and New York: The deal delivers too little to homeowners, is too quick to let the banks off the hook for alleged fraud, or some combination of the two.

Despite these setbacks, people involved in the negotiations expect the deal eventually to be finalized. "I think most states will get on board with the settlement," said a source in one state attorney general's office, who was not authorized to speak on the record. "Yes, they are negotiating state-specific stuff, but I don't know of anybody who's definitely turning it down."

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