By Alan Zibel and Nick Timiraos
Republicans in Congress raised numerous objections to a draft proposal by state attorneys general to settle allegations that mortgage companies broke state laws when handling foreclosures.
In a letter being sent to Treasury Secretary Timothy Geithner, House lawmakers said they have "significant concerns" about the settlement proposal. And Sen. Richard Shelby (R., Ala.) called it "nothing less than a regulatory shakedown" by bank regulators and the Obama administration.
Last week, state attorneys general and federal agencies delivered a 27-page set of proposed rules that would reshape the way mortgage servicers deal with troubled borrowers.
The proposal was drafted by Iowa Attorney General Tom Miller and several other attorneys general in response to revelations that banks used "robo-signers" who didn't review documents their colleagues prepared. The proposed rules cover every aspect of the foreclosure process, including the appropriate fees that mortgage servicers can charge, the way that they evaluate homeowners for modifications and the way banks must demonstrate loan ownership when they proceed to foreclosure.
State and federal officials are moving to address longstanding complaints from consumers and housing advocacy groups that getting assistance is an extremely difficult process for consumers. Republican lawmakers and banks, however, call the proposed rules an effort by the government to micromanage industry practices.
"The settlement would transform the mortgage servicing industry and fundamentally change the rules that have historically governed relationships among borrowers, servicers and investors," wrote the House lawmakers, led by Rep. Scott Garrett (R., N.J.). "The breadth and scope of the draft settlement proposal raise significant concerns about its effect on the financial system."
In the letter, the lawmakers asked Geithner for a detailed response to their questions by next Friday. In response, Colleen Murray, a Treasury Department spokeswoman, said: "The mortgage servicing system we have today is broken, and we should work together to establish a stronger set of standards and best practices."
Also signing the letter are the House Financial Services Committee's chairman, Rep. Spencer Bachus (R., Ala.), and fellow lawmakers Rep. Randy Neugebauer (R., Texas), Patrick McHenry (R., N.C.) and Pete Sessions (R., Texas.)
The lawmakers also said they were concerned about the role being played by the fledgling Bureau of Consumer Financial Protection, which they said "does not yet have any regulatory or enforcement authority." The proposed servicing rules would put that agency in charge of overseeing specific steps over how banks evaluate borrowers for loan modifications.
Officials have been discussing whether to impose large financial penalties on servicers. Those penalties could include requirements that banks write down more than $20 billion of loan balances for borrowers who owe more on their properties than their homes are worth.
Shelby, speaking at a Senate hearing, said that piece of the settlement talks "appears to be an attempt to advance the administration's political agenda, rather than an effort to help homeowners who were harmed by a servicer's actual conduct."
Many Democrats, however, favor the state attempts to ramp up pressure on mortgage companies to slash borrowers' loan balances and prevent foreclosures.
"The modifications with principal reductions have a much greater success rate" than others offered by banks, said Rep. Brad Miller (D., N.C.). Forcing banks to enact more widespread help would benefit the economy, he said. "Everybody's being hurt by the continued decline in the housing market."