HSBC Holdings will pay government regulators and law enforcement agencies a total of $601 million in response to allegations of mortgage origination, servicing and foreclosure abuses.
The largest portion of the settlements is the $470 million that HSBC Bank USA and its affiliates agreed to pay to the Department of Justice, the Department of Housing and Urban Affairs, the Consumer Financial Protection Bureau, 49 state attorneys general and the District of Columbia’s attorney general.
The settlement puts to rest claims that it failed to provide effective oversight of the loan servicing, loss mitigation, foreclosure activities and related mortgage servicing functions, including the bank’s risk management, audit and compliance programs; vendor management; document execution practices; and staffing and managerial resources.
Of that total, $370 million will go toward consumer relief in the form of reducing the principal on mortgages for borrowers who are at risk of default, reducing mortgage interest rates, forgiving forbearance and other forms of relief.
Another $40.5 million will be paid to the federal parties, with $59.3 million going into an escrow fund administered by the states to pay back borrowers whose homes were foreclosed between 2008 and 2012.
HSBC will also pay $200,000 into an escrow fund to reimburse the state attorneys general for investigation costs and an additional $131-million civil money penalty to the Federal Reserve Board for similar claims.
Among the Fed’s allegations were that the bank’s employees filed court affidavits making false assertions about the ownership of mortgages, the amount of principal and interest due and the fees and expenses chargeable to the borrower. Some of those court documents were not properly notarized, the board further alleged.
Why this story sounds familiar
The settlements parallel the $25-billion National Mortgage Settlement (NMS) reached in February 2012 between the federal government, 49 state attorneys general, the District of Columbia’s attorney general and the five largest national mortgage servicers, as well as the $968-million settlement reached in June 2014 between those same federal and state partners and SunTrust Mortgage.
As part of the settlement agreements, HSBC will be required to implement standards for the servicing of mortgage loans, the handling of foreclosures and ensuring the accuracy of information provided in federal bankruptcy court.
The standards provide oversight of foreclosure processing, including third-party vendors, and new requirements to undertake pre-filing reviews of certain documents filed in bankruptcy court.
HSBC will be required to evaluate homeowners for potential loss-mitigation options before pursuing foreclosure as a last resort, and the bank may not foreclose while a homeowner is being considered for a loan modification.
Lost trust, fewer privileges
Compliance with the agreements will be overseen by an independent monitor, Joseph A. Smith, Jr., the former chairman of the Conference of State Banks Supervisors and the monitor for the NMS and SunTrust settlement.
Smith will file public reports that identify any quarter in which HSBC failed to meet the imposed standards. The bank could face penalties for noncompliance.
“We are pleased to have reached this settlement and believe it is a positive result that benefits American homeowners and the U.S. housing industry,” said Kathy Madison, CEO of HSBC Finance Corp. “Throughout the housing market downturn, HSBC stayed focused on home preservation and approached foreclosure as a last resort option, and this agreement affirms our commitment to assisting customers who are facing financial difficulties.”
Shares of HSBC Holdings have declined 29.21 percent in the last year, to a low of $33.33 on Feb. 5, the day the settlements were announced. Morgan Stanley downgraded the rating on the company from “Equal-Weight” to “Underweight.”
Bigger fish to fry
More trouble may lay ahead for the banking giant. While the settlements resolve potential violations of civil law, the agreements leave the door open for state and federal authorities to pursue criminal enforcement actions, or for individual borrowers to bring their own lawsuits.
In addition, HSBC faces a legal battle over whether a report on the company’s money laundering monitoring efforts should be released to the public.
The 250-page report was prepared by an independent bank monitor in conjunction with a $1.92-billion settlement in 2012 between HSBC and the DOJ.
The charges allege HSBC failed to prevent money laundering by Mexican drug cartels and hid transfers for clients in Cuba, Iran and Syria in violation of U.S. sanctions imposed on those countries.
HSBC, the DOJ and the bank monitor all fought to keep the report under seal, arguing that making it public would expose sensitive information about anti-money laundering efforts and harm regulators’ future efforts to work with employees cooperating with the government under the protection of confidentiality.
However, Judge John Gleeson of the Federal District Court in Brooklyn, New York, who approved the settlement in 2013, issued an opinion on Jan. 28 ordering the release of the report, with some sensitive information redacted.
“You put me in this position,” Gleeson said in a hearing a few weeks before. “I can’t for the life of me figure out why the sun shouldn’t shine. I find that the report is a judicial record, and that the public has a First Amendment right to see the report.”
The DOJ has asked Gleeson to stay his order so it can appeal the decision.
