The biggest action against the banks for foreclosure-related abuses has been the $26 billion settlement between the five largest mortgage servicers and the state attorneys general, the Justice Department and the Department of Housing and Urban Development after allegations arose in 2010 that bank employees had daily been churning through hundreds of documents used in foreclosure proceedings without properly reviewing them for accuracy.
The same banks in that settlement -- Ally Financial, Bank of America, Citigroup, JPMorgan Chase and Wells Fargo -- are included in the current negotiations.
Under the terms of the settlement being negotiated, $6 billion would come from banks to be used for relief for homeowners, including reducing their principal, helping them refinance and donating abandoned homes, the people said.
The proposed settlement would also halt a separate sweeping review of more than four million loan files that the comptroller's office and the Federal Reserve required that the banks undertake as part of a consent order in April 2011.
Under the terms of the order, the 14 banks had to hire independent consultants to pore through the loan records to determine whether the banks had illegally charged fees, forced homeowners to take out costly insurance or miscalculated loan payment amounts. Consultants initially estimated that each loan would take about eight hours, at a cost of as much as $250 an hour, to go through.
The costs of the reviews have ballooned, though, according to people with knowledge of the reviews, in part because each loan file is taking as long as 20 hours to review. Since its inception, the reviews have cost the banks about $1.5 billion, according to those people.
Pressure to reach a settlement with the banks has been building, particularly within the Office of the Comptroller of the Currency, amid widespread frustration that the banks' mandatory review of loan files was arduous and expensive, and would not yield promised relief to homeowners, according to five former and current banking regulators.
In private meetings with top bank executives, those people said, regulators have admitted that the reviews went awry. At one point last month, an official from the comptroller's office said the agency had "miscalculated" the scope and requirements of the reviews, according to the people with knowledge of the negotiations.
When the settlement discussions heated up last month, some banking executives said they felt they would be vindicated by the regulators. These executives said that they had raised objections to the reviews early on, but those concerns were largely dismissed by regulatory officials, according to the people with knowledge of the negotiations.
Instead, officials from the comptroller's office, these people said, have used the loan reviews as a negotiating tool, telling banks that they can either sign on to a large settlement or be forced to pay billions over several more years until the consultants finish the reviews.
When regulators approached the banks to broach a settlement last month, they met first with Wells Fargo and proposed that the banks pay $15 billion, according to the people familiar with the discussions. After negotiations, though, the regulators agreed to $10 billion.
All of the 14 banks are expected to sign on.
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