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US files $25 billion settlement with banks on mortgage abuses

The federal government and 49 state attorneys general Monday asked a federal judge to approve a sweeping $25 billion settlement with mortgage lenders over foreclosure abuses that helped contribute to the worst housing crisis since the 1930s.

The Department of Justice, in announcing the filing with the U.S. District Court for the District of Columbia, called it "the largest federal-state civil settlement ever obtained." The DOJ said the settlement with Bank of America, J.P. Morgan Chase, Wells Fargo, Citigroup and Ally Financial would resolve violations of federal and state law stemming from such practices as "robo-signing."

The long-awaited settlement, announced more than a month ago, still requires a judge's approval.

"The complaint we filed sets the stage for what we anticipate will be a series of powerful federal court orders. We expect that many consumers across the country will soon start to see the significant direct relief and the new mortgage servicing standards that we negotiated as part of this settlement," said Iowa's Attorney General Tom Miller.

The agreement would require the lenders to provide relief to foreclosed borrowers to the tune of $20 billion.

Among the relief proposed in the settlement:

  • Reducing principal on loans for borrowers who are delinquent or at imminent risk of default and underwater on their loans
  • Refinancing loans for borrowers who are current on their mortgages but underwater
  • Forbearance of principal for unemployed borrowers (meaning that borrowers can tack some of the principal on the end of the loan as a zero-interest balloon payment)
  • Anti-blight provisions
  • Short sales
  • Transitional assistance
  • Benefits for service members

The lenders will also be required to pay federal and state governments an additional $5 billion in cash, of which $1.5 billion will be used to  establish a borrower payment fund to provide cash payments to borrowers whose homes were sold or taken in foreclosure between Jan. 1, 2008, and Dec. 31, 2011, and who meet other criteria, the DOJ statement said.  

Related: What the mortgage settlement means to you

"It’s the largest multistate settlement since the Tobacco Settlement in 1998," the attorneys general said on a website devoted to explaining the settlement to homeowners who may be affected.

The settlement also requires lenders to prevent mortgage abuses in the future, including prohibiting "robo-signing," improper documentation and lost paperwork. In addition, lenders' standards would also make foreclosure a last resort after other options were explored; stop banks from foreclosing on a home while the owners were being considered for a loan modification; set protocol and a timeline for reviewing loan modification applications and give owners the right to appeal if they are denied; and create a single point of contact and adequate staff to handle questions. 

Broken down by the banks involved, the settlement includes these payments:

  • Ally - $110 million federal and state governments; $200 million in relief to borrowers
  • BofA - $3.24 billion and $8.58 billion, respectively
  • Citigroup - $415 million and $1.79 billion
  • JPMorgan - $1.08 billion and $4.21 billion
  • Wells Fargo - $1.01 billion and $4.34 billion

Related: Homeowners beating banks at their own game