State Prosecutors to Banks: Here’s a Deal for Robo Signing Liabilities

State prosecutors are offering to limit the legal liability of big banks over improper mortgage practices in exchange for a multibillion dollar settlement. Bank of America (NYSE:BAC), JPMorgan (NYSE:JPM), Wells Fargo (NYSE:WFC), Citigroup (NYSE:C), and Ally Financial have all been accused of breaking state laws by hiring “robosigners” who signed off on foreclosure documents without reviewing the paperwork.

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Some are worried the deal could be offering banks (NYSE:KBE) far too broad a release from liability, but banks have been pressing for immunity as a key term in settlement discussions, as their ongoing exposure to mortgage-related litigation has battered their share prices. If agreeing to offer the banks immunity, state prosecutors will likely be looking to increase the penalty of the current suit, now expected to total $10 billion to $25 billion.

Banks (NYSE:XLF) and prosecutors will continue discussions this week in order to hammer out a deal. While they are close to an agreement on future standards governing the servicing of home loans, legal liability claims, as well as compliance, enforcement, and the amount of the settlement, are still being debated.

Federal and state agencies hope to use money from the settlement to improve the housing market (NYSE:IYR) and secure debt relief for distressed homeowners, though some officials are accusing them of not properly investigating allegations in their haste. And though prosecutors’ offer only attempts to release banks from liability with respect to home repossessions and not from securitization claims, the broad language of the agreement could be used to prevent prosecutors from bringing securitization claims in the future.

Because the current proposal would release banks from legal liability over how mortgage documents were maintained, prepared, and transferred, it could be used to evade state lawsuits related to mortgages bundled into securities, as allegations that banks improperly maintained and transferred documents during the securitization process are at the heart of prosecutors’ cases against them, and could be negated by the wording of this settlement.

Of course, it is not prosecutors’ intent to release banks from securitization liability, so the wording of the document will have to be precise. Attorneys general from New York, Delaware, Massachusetts and Nevada have all said they would not agree to such a proposal. Catherine Cortez Masto, Nevada’s legal officer, brought suit against Bank of America’s (NYSE:BAC) Countrywide unit last week after finding that the lender didn’t properly transfer mortgages into the trusts that issued securities to investors, and yet still fraudulently pursued home seizures. New York’s Eric Schneiderman has indicated similar findings in his own investigation.

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