The Obama Administration announced a $335 million settlement deal with Bank of America to settle charges of discriminatory lending practices. Here is, in ascending order of importance, the good, the bad, and the ugly.
The Justice Department deserves praise for responding to illegal bank behavior more aggressively than it's done in the past. So does the Occupy movement, and so do the many Americans who have expressed their outrage over the lack of prosecutions and sweetheart bank deals. Without them it's unlikely we'd be seeing a deal like this at all.
But while the Justice Department has taken a first step, the proposed agreement seems designed to do only the bare minimum its framers hoped would be needed to quell public outrage. While it will be sold as bold and decisive, it's not. In fact, this deal perpetuates some of the worst failings of past settlements the government's made with big banks.
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As we said, it has good features. But where it's ugly, it's very ugly indeed. Hopefully the judge who reviews it will bear that in mind.
First, let's offer some positive reinforcement for our leaders in Washington: The agreement is meant to settle charges that Countrywide, which is now owned by Bank of America, systematically discriminated against African American and Latino homeowners in issuing loans. Discriminatory lending is endemic in the banking industry and can take a variety of forms, including charging higher interest rates for minorities, pressuring borrowers to exclude their spouses from mortgages, and predatory lending practices which target minority communities.
As the Justice Department noted in its announcement, this is the largest fair lending agreement in history. Ideally, that should have a discouraging effect on future discriminatory banking practices.
The money is to be used to compensate victims of bank discrimination. Banks are too rarely required to compensate their victims by returning unjustly earned profits. It also requires the bank to hire a third party Settlement Administrator, rather than rely of the banks themselves.
Banks were permitted to administer the Administration's HAMP program, and the results were brutal, cruel, manipulative and self-serving. Bank self-administration turned what was intended as a homeowner-help program into an “extend and pretend” program of systematic deception that bilked homeowners of millions more in mortgage payments, by giving them false hopes of more favorable loan terms, before foreclosing on them anyway.
So a third-party administrator seems like an improvement over past practice.
Unfortunately it will be the bank itself, not the government, that selects and oversees the Administrator. While the program will be subject to the government's oversight and review, its track record on performing those functions has been extremely poor under both President Bush and President Obama. The banks' “extend and pretend” manipulation was carried out under the permissive eye of the Treasury Department, which didn't seem troubled by their behavior at all. So another debacle is all too possible.
What's more, the figure of $335 million sounds large. But without more publicly available information on the scope and nature of the fraud that was committed, we have no way of knowing whether the perps are giving back all the money they made illegally – or whether they'll still able to keep a big chunk for themselves.
For perspective, Countrywide issued millions of loans during the period under review. Even if the average discriminatory loan “only” robbed the borrower of $10,000 in excessive charges, $335 million would compensate fewer than 35,000 homeowners. The real numbers could be much higher than that. But the settlement would end the process of public investigation and disclosure, so we may never know if it's passed.
When this deal is bad, it's very very bad. It has four very ugly flaws:
Banks can still settle without admitting wrongdoing. The government has finally heard the 99 percent's outrage over the “neither admit nor deny wrongdoing” language in past settlements. So they've gotten tough bank this time around and have forcefully insisted on … rephrasing that language. It says the same thing, but uses different words.
The settlement says that “There has been no factual finding or adjudication with respect to any matter alleged by the United States. The parties have entered into this … in order to avoid the risks, expense, and burden of litigation and in order to resolve voluntarily the claims made in United States' claims …”
Worse, it even says this: “Defendants deny all the actions and claims of a pattern or practice of discrimination.” Even the Settlement Administrator language repeatedly refers to “allegedly aggrieved” persons who are “alleged” victims of the bank's discriminatory practices.
That's unacceptable and disgraceful. If they didn't do anything wrong, why would there be a settlement?
Once again bankers have bought their way out of being investigated without even acknowledging their wrongdoing. Justice isn't served when that happens. And as Judge Rakoff noted last month in the Citigroup case, the public interest isn't served when the truth is shielded from the public.
It goes after a bank that no longer exists. One of the main reasons to pursue bank criminality is for the deterrent effect. But there's much less of that in place when the bank in question no longer exists as an independent entity.
Here's how the proposed agreement reads: “The settlement requires Countrywide to implement policies and practices to prevent discrimination if it returns to the lending business during the next four years. Countrywide currently operates as a subsidiary of Bank of America but does not originate new loans.”
In other words, they've finally gotten one bank to stop discriminating – but it's one that doesn't write loans anymore anyway.
Why aren't they suing banks that are still writing loans, and who have engaged in a series of shady practices? They could start with Countrywide's parent, Bank of America. There's considerable evidence that BofA is one of the country's dirtiest banks when it comes to foreclosure fraud – and there's stiff competition for that title. It's been sued for a number of other shady practices, too. (There's more here.)
Besides, isn't discrimination always illegal? Is the government telling Countrywide, “You can break anti-discrimination laws, but not for four years”? That's easy to work around: Just put all loans are through BofA until 2016 – discrimination allowed there! – then go back to using Countrywide paper to discriminate too.
Stop the Revolution! The masses have been served. Not.
It addresses one form of bank wrongdoing – but not more widespread ones involving prosecutable criminal activity. Banking discrimination is morally repugnant and vile. But there is a massive stockpile of evidence suggesting overtly criminal behavior in need of prosecution. These include filing false court documents to pursue foreclosures – perjury; defrauding investors by making false statements about a bank's fiscal condition; defrauding investors in mortgage-backed securities (MBS); and a number of other violations great and small.
There still hasn't been a single prosecution for these crimes, in contrast to the more than 1,000 criminal convictions obtained under that radical socialist President Ronald Reagan after the much smaller savings and loan scandal of the 1980s.
These are the kinds of crimes that brought down the economy. They're the kinds of crimes that should lead to handcuffs and perp walks. They're the kinds of crimes the government still won't pursue. It would rather push a sweetheart deal with the banks instead. Good thing some state Attorneys General haven't let them.
It's peanuts to Bank of America: BofA took $45 billion in TARP funds and another $91 billion in secret Fed loans, which the landmark Bloomberg report shows gave it a government-granted 'gift profit' of $1.5 billion. In other words, the government has 'gifted' BofA nearly five times as much as it's asking in this settlement agreement.
The wrongdoers are still too big to fail – or prosecute: Even on today's Wall Street Bank of America's executives stand out for their moral laxity and lack of professional competence, from CEO Brian Moynihan on down. Moynihan's a lawyer, not a financial person, which means he's earned his money negotiating this deal. But he still shouldn't be running a bank, and neither should his senior team.
The US has at least six too-big-to-fail banks, each of which constitute a threat to the global economy. But BofA's the worst of the worst. As Mary Bottari has pointed out, it “claims $2.2 trillion in assets equivalent to 15% of our entire economy, yet it is trading for $5 a share … (and) is trying to move $22 trillion in derivatives out of its Merrill Lynch subsidiary and put them into its FDIC-insured bank” – which would leave you and me on the hook once again for bad bets and shady deals made this bank and its Gang That Couldn't Bank Straight management.
The Administration should be moving aggressively to break up BofA, along with Citigroup – for starters. (Mary's organization has a petition asking the Administration to break up Bank of America.)
This settlement will need to be approved by a judge. Presumably California Attorney General Kamala Harris will also have a say, since Countrywide operated in her jurisdiction. Harris has been one of the courageous state AGs willing to buck the Administration's foreclosure fraud settlement, and we look forward to hearing from her about this proposal. And we hope the judge will find some of the more outrageous aspects of this settlement unacceptable.
We applaud The Good, but there will need to be a lot less of The Bad — and major fixes for The Ugly – before anyone can claim that the economy is secure or that justice has been served.