It’s flat-out astonishing that any settlement with banks that clocks in at $26 billion and, even then, doesn’t bar future legal risk is deemed by some to be a non-event. Much of the pooh-poohing in the trade press sprang from simple ennui – reporters were so tired of writing stories forecasting the settlement that never happened that, by the time it did, they didn’t much care anymore. But, the settlement is a strategic change in the legal and reputational risk landscape, and not just for what’s left of mortgage banking. In our view, it signals a new structure for enforcement actions, one that will quickly be deployed against a wide array of retail-banking products with or without a lift from the CFPB. And, the settlement’s reach could go farther, also setting a new standard for enforcement in other arenas – forex pricing, for example – that tickle the AGs’ fancy.
We deal here with the settlement’s impact on banking, not on borrowers. Who done whom wrong and who didn’t pay what back isn’t settled by this case, since anyone with a gripe still has all of his or her legal remedies at the ready. In contrast, big banks are surprisingly powerless to dispute future assertions made against them or to avoid walloping penalties based on these accusations.
The reason for this is, to us, the most striking aspect of the settlement: its new enforcement mechanism. Judging whether or not banks comply with the settlement will be ripped from the bank regulators and handed over to a new independent company that will report strictly to state and federal law-enforcement officials. This has never, ever happened before for civil violations that are, arguably, not even violations of any laws but those the banking agencies are expressly charged by law to enforce. In fact, the settlement states that no court could have ordered the banks to submit to the AGs – the AGs just clobbered the industry into submission and got them to agree to it.
In part, the banks were hammered because the regulators, up to now, have been mostly on their side. It took until late last year for the banking agencies to issue any type of enforcement action related to mortgage-foreclosure practice and, when they did act, it was largely in hopes of forestalling the pending AG agreement or even of preventing it with an intervening, more moderate, action with which the banks had come to learn they could live. But, by the time the banking-agency settlement was struck, two things happened: first, the AGs had moved so far along into their investigation that some states argued it needed to go farther and be much tougher – making it impossible to muzzle the more sympathetic AGs – and the banking agencies’ own delay had marred their credibility with the Obama Administration and the public.
Increasingly, the public sees the banking agencies as in cahoots with the banks and, thus, as untrustworthy protectors of the public interest. Ironically, had the banking agencies acted more quickly and with greater cost to banks, the far greater adverse impact now evident in the settlement to them and their charges would have been averted.
But, they didn’t and, so it wasn’t. Now, the AGs have the upper hand on compliance with the mortgage settlement and we would guess they will use it with dispatch any time they disagree with a bank’s representations about its compliance effort. And, given the way AGs are, the enforcers will also go straight to the public airwaves any time they differ with a bank or take a pint of flesh from it. This will exacerbate the reputational risk aspect of the current settlement, contributing to the ongoing deluge of adverse publicity that exacerbates public anger and, then, still more regulation and enforcement.
Can all this be contained to mortgage finance? We don’t think so. Buoyed by this victory and buttressed by the publicity that can be reaped from it, state AGs will mount up. As prosecutors, they are trained to go for the kill and, if they can, they will to gain the long-sought advantage over banks in each of the states in which federally-chartered firms do business. The next time, banks may fight back and win, but the next time will be soon, the fight will be hard and the victory far from certain