Banks Could Face Stiff New Foreclosure Rules

State attorneys general handed a new set of rules to the nation’s big banks Thursday that would require them to write down loan balances on troubled mortgages. The only question is whether or not this 27-page proposal comes attached with any teeth.

The document is partly a response to the “robo-signing” foreclosure mess from last fall. According the the Wall Street Journal:

“The proposal represents the clearest indication that the 50 state attorneys general are working hand-in-hand with the Obama administration and other regulators to pursue a significantly broader settlement against the banks than any of the federal agencies might be able to win by themselves.”

In addition to following the new mortgage modification guidelines, the big banks may still face fines of $20 billion or more for their slips in foreclosure protocol standards.

The new rules, created by the state attorneys general and the new Consumer Financial Protection Bureau (CFPB), along with several other government agencies, calls for banks to try reducing loan balances for mortgage modification customers more often, instead of just lowering their monthly payments.

Another term of the proposal would make it forbidden to start foreclosure proceedings on any borrower who is in the middle of a mortgage modification effort. And as long as borrowers make three full, timely payments on a trial modification loan, they would automatically be switched into a permament modification.

All these terms and more account for drastic changes to be made across the banking industry. In the end though, this proposal is still just a proposal and will probably be heavily negotiated during the next few months. In any case, it is certainly a much farther reach of government power into the private sector.

Jaret Seigberg, policy analyst at MF Global in Washington, was quoted in the New York Times and summed up the situation as follows:

“This further cements the C.F.P.B.’s authority in the financial space and puts them at the top of the pyramid when it comes to the mortgage modification fight,” he said. “From the perspective of the banks, this is the last place you want to be.”

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