Attorney General Brown Announces Largest Predatory Lending Settlement in History: $8.68 Billion in Home Loans and Foreclosures Relief Nationally—Up to $3.5 Billion to Californians—From Countrywide Financial Corporation

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California Attorney General Brown was the first of many state’s Attorneys General to sue Countrywide Financial in June and we reported on the significance of his action then. His lawsuit alleged that Countrywide, the nation’s largest mortgage lender prior to its July 2008 acquisition by Bank of America, deceived borrowers by misrepresenting loan terms, loan payment increases, and borrowers’ ability to afford loans.

In a press release shortly after midnight, Brown announced a settlement with Countrywide Financial Corporation and Full Spectrum Lending that is truly historic. A press conference is scheduled for later this morning.

Attorney General Brown pointed to the importance of action he took with other states in contrast to the lack of action by the Bush Administration: “Unlike last week’s congressional bailout, this loan-modification program provides real relief for borrowers at risk of losing their homes. Tragically, California and the other states have had to step in because federal authorities shamelessly failed to even minimally regulate mortgage lending.”

After filing this suit, Brown amended court filings to add in “shocking new details” discovered about Countrywide Financial’s deceptive business practices which included ignoring their own underwriting guidelines and rewarding employees for selling risky home loans.

“These shocking new details provide further evidence of Countrywide’s dangerous lending practices, which included ignoring borrowers’ low credit scores and rewarding employees for selling risky loans,” Brown said at the time. “In one case the company approved an adjustable rate mortgage to an 85-year-old disabled veteran with such a low credit score and high debt that he defaulted in less than six months.”

Under the terms of the settlement, eligible subprime and pay-option mortgage borrowers with loans from Countrywide will be able to avoid foreclosure by obtaining modified and affordable loans. Here is the information released by Brown’s office:

The loans covered by the settlement are among the riskiest and highest defaulting loans at the center of America’s foreclosure crisis. Assuming every eligible borrower and investor participates, this loan modification program will provide up to $3.5 billion to California borrowers as follows:

• Suspension of foreclosures for eligible borrowers with subprime and pay-option adjustable rate loans pending determination of borrower ability to afford loan modifications;

• Loan modifications valued at up to $3.4 billion worth of reduced interest payments and, for certain borrowers, reduction of their principal balances;

• Waiver of late fees of up to $33.6 million;

• Waiver of prepayment penalties of up to $25.6 million for borrowers who receive modifications, pay off, or refinance their loans;

• $27.9 million in payments to borrowers who are 120 or more days delinquent or whose homes have already been foreclosed; and

• Approximately $25.2 million in additional payments to borrowers who, in the future, cannot afford monthly payments under the loan modification program and lose their homes to foreclosure.

More specifically, the modification program covers subprime and pay-option adjustable-rate mortgage loans in which the borrower’s first payment was due between January 1, 2004 and December 31, 2007. The program will be available for loans in default that are secured by owner-occupied property and serviced by Countrywide Financial or one of its affiliates. In addition, the borrower’s loan balance must be 75% or more of the current value of the home, and the borrower must be able to afford adjusted monthly payments under the terms of the modification.

The terms of the modification will vary based on the type of loan, including:

• “Pay-option ARM loans,” in which loan balances increase each month if a borrower makes only a minimum payment. Borrowers may be eligible to have their principal reduced to 95% of their home’s current value and may also qualify for an interest-rate reduction or conversion to an interest-only payment.

• Subprime adjustable-rate loans, such as 2/28 loans. Borrowers may have their interest rate reduced to the initial rate. If the borrower still cannot afford it, the borrower may be eligible for further interest-rate reductions to as low as 3.5%.

• Subprime fixed loans. Borrowers may be eligible for interest-rate reductions.

• “Hope for Homeowners Program.” If they qualify, some borrowers may be placed in loans made through this federal program.

• Alt-A and prime loans. Borrowers who are in default, but have Alt-A and prime loans, may also be considered for modifications, depending on circumstances.

In addition to the settlement’s direct relief to borrowers, Bank of America, who negotiated the settlement with the Attorney General following its acquisition of Countrywide, has agreed that it will suspend offering, under its own name or through Countrywide, subprime loans or loans that can negatively amortize. The bank has significantly restricted the circumstances under which it will make so-called “no doc” or low-documentation loans, in which borrowers do not fully document their ability to repay their mortgages.

“With this settlement, homeowners will receive direct relief from the catastrophic damage caused by Countrywide,” said Attorney General Brown. “Countrywide’s lending practices turned the American dream into a nightmare for tens of thousands of families by putting them into loans they couldn’t understand and ultimately couldn’t afford.”

According to Brown, the Countrywide settlement will likely become the largest predatory lending settlement in history, dwarfing the nationwide $484 million settlement with Household Finance Corporation in 2002, under which California received approximately $91 million.

In addition to California, attorneys general in 10 states, including Arizona, Connecticut, Florida, Illinois, Iowa, Michigan, North Carolina, Ohio, Texas and Washington, are participating in the settlement. Attorney General Brown’s office, along with the Office of the Illinois Attorney General, led the negotiations for the states. The Countrywide parties to the settlement include parent Countrywide Financial Corporation, Countrywide Home Loans and Full Spectrum Lending.

And this is not the end of this chapter. The settlement does not include Angelo Mozilo, the former Chairman and Chief Executive of Countrywide Financial Corporation or David Sambol, formerly the President of Countrywide Home Loans and the President and Chief Operating Officer of Countrywide Financial Corporation. Brown will continue to prosecute separately his case against Mozilo and Sambol.

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