Consumer-Relief Fund Monitorships
This is an Insight article, written by a selected partner as part of GIR's co-published content. Read more on Insight
From 2012 to 2017, following the National Mortgage Settlement, the inclusion of consumer relief provisions – and the related appointment of monitors – in bank settlements with the US Department of Justice (US DOJ) was relatively routine. The US DOJ’s subsequent settlements with JPMorgan Chase & Co, Bank of America Corporation, Citigroup Inc, Goldman Sachs & Co, Deutsche Bank AG and Credit Suisse Securities (USA) LLC for fraud in the packaging and sale of residential mortgage-backed securities (RMBS) each contained consumer relief requirements and the appointment of an independent monitor. The expectation was that these consumer relief provisions would help homeowners and communities struggling as a result of the financial crisis, which, according to the US DOJ, was caused in part by each settling bank’s misconduct.
Indeed, in announcing the US DOJ’s settlement with Deutsche Bank AG in January 2017, US Attorney General Loretta E Lynch stated: ‘Deutsche Bank did not merely mislead investors; it contributed directly to an international financial crisis.’ She further explained that the US$4.1 billion in consumer relief was to go to ‘homeowners, borrowers, and communities harmed by [the bank’s] practices’. Notably, she did not make any distinction between whether the homeowners and others were direct or indirect victims of the bank’s misconduct.
Approximately five months after announcing this settlement, however, and following a change in administration, the US DOJ made this distinction plain. On 5 June 2017, Attorney General Jefferson B Sessions, who succeeded Attorney General Lynch, issued a memorandum titled ‘Prohibition on Settlement Payments to Third Parties’ (the Sessions Memorandum). In it, he criticised prior settlements that directed payments to ‘non-governmental, third-party organizations’ that were ‘neither victims nor parties to the lawsuit’ and stated that the practice would stop going forward. He was careful to note, however, that this prohibition does not apply to restitution payments to victims or payments that ‘otherwise directly remed[y] the harm that is sought to be redressed’. Thus, this memo went straight to the heart of the consumer relief settlements, since they never required proof that the individuals or communities obtaining relief were directly harmed by the settling entities’ unlawful conduct.
Not surprisingly, following the issuance of this memorandum, the US DOJ’s settlements with banks relating to similar misconduct did not contain consumer relief provisions. In 2018, the US DOJ settled with Barclays, HSBC, RBS, Wells Fargo and Nomura for unlawfully packaging and selling RMBS. None of these settlements contained a consumer relief provision or required the appointment of a monitor. At the time of writing, there has been yet another change in administration, but the Sessions Memorandum, with slight clarifications regarding only limited exceptions, has been codified as the US DOJ’s official policy.
There have been reports, however, that current US Attorney General Merrick B Garland might revisit the relative merits of the Sessions Memorandum. If this is true, he has available for review and analysis significant amounts of data regarding the use of prior consumer relief settlement payments, the benefits, if any, that were conferred, and suggestions for improving this type of settlement in the future. These data are the result of thorough analysis by independent monitors selected to oversee the banks’ provision of consumer relief. Many of these analyses, moreover, are only recently available because the settling banks did not satisfy their consumer relief obligations, giving the monitor the opportunity to review the totality of the relief provided, until after issuance of the Sessions Memorandum.
For example, on 8 July 2020, the independent monitor of Deutsche Bank AG published his final report. As explained in the report, Deutsche Bank satisfied the terms of its consumer relief obligations by financing the origination of mortgage loans to low-to-moderate income (LMI) borrowers and homeowners in hardest hit areas (HHAs). In total, Deutsche Bank financed the origination of 379,966 purchase money loans between 2017 and 2019 to these homeowners. These loans were made across 50 states and the District of Columbia, totalling more than US$84 billion in mortgage principal loaned. To put the enormity of this effort in context, the 252,243 loans the bank financed in 2018, alone, constituted more than 4 per cent of the total mortgage market for that year. These numbers, however, told only part of the story.
In his final report, the monitor included a detailed analysis of the economic characteristics of the locations where the loans were made and of the borrowers who received them. He also examined whether the bank’s rate of lending in distressed areas and to lower-wealth borrowers was similar to or different from the overall mortgage market (as reported in the 2018 Home Mortgage Disclosure Act data) and, if so, to what extent. He examined whether the bank’s loans were made in distressed areas by using various indicators that looked beyond the broad HHA designations, such as census tracts bearing certain hallmarks of economic distress, including higher unemployment, declining populations and lower incomes. In addition, the monitor addressed whether the bank’s loans went to lower-wealth borrowers by using various indicators concerning the borrowers’ income, loan size and loan type.
Using this analytical framework, the monitor examined the bank’s lending into different areas – within the entire nation, the HHAs, the non-HHA states and Maryland – to understand the characteristics of the bank’s loans, the borrowers and the areas into which the loans were originated.
The monitor’s detailed analysis revealed that, in this instance, the mortgage lending encouraged by the consumer relief provision helped many people and locations in need, at times to a significantly greater degree than the comparable mortgage market. For example, the bank’s loans went to homeowners in tracts with the highest unemployment in the nation almost 19 per cent more often than the overall mortgage market. And, although the bank followed the rate of lending of the overall market in distressed tracts where the average income was at or below 100 per cent of LMI, it still made more than 46 per cent of its entire population of loans, for a total of 172,906 loans, in distressed areas.
The bank’s borrowers nationwide also were of lower wealth across almost every indicator examined. Their average income (US$79,750) was more than 14 per cent (or more than US$13,000) lower than the national average (US$93,393) and their average loan size (US$221,546) was more than 5 per cent (or more than US$12,000) lower than the national average (US$233,594). More than half of the bank’s borrowers (52.83 per cent), for a total of 198,277 borrowers, had incomes at or below 100 per cent of LMI, which was almost 20 per cent better than the market. The bank also made loans to borrowers with incomes at or below 80 per cent and 50 per cent of LMI at rates significantly better than the market. Last, almost 39 per cent of its loans, for a total of 147,730 transactions, were insured by the US Federal Housing Administration (FHA), an indicator of lower wealth, which was more than 32 per cent greater than the overall mortgage market.
When the bank financed loans in the 32 non-HHAs, as it did 17 per cent of the time, it did so in distressed areas and to lower-wealth borrowers at high rates that were consistently far greater than those in the general mortgage market. For example, the average income of Deutsche Bank’s borrowers (US$53,159) was US$41,495 less than the average income of all borrowers in the market (US$94,654). Also, more than 76 per cent of the bank’s loans went to borrowers with incomes at or below 80 per cent of LMI, which beat the market by more than 145 per cent. Slightly more than half (50.92 per cent) of its loans in non-HHAs were guaranteed by the FHA, which was almost 74 per cent more than the market.
In Maryland (a non-HHA state), the bank’s rate of lending beat the market consistently and significantly in every distressed census tract and lower-wealth indicator examined. Among other things, it made more than 62 per cent of its loans to FHA borrowers, beating the market by almost 78 per cent, and more than 26 per cent of its loans to borrowers with an income at or below 50 per cent of LMI, topping the market by more than 115 per cent.
Within the HHAs, almost 49 per cent of the bank’s loans were made in census tracts the monitor identified as distressed (either the US Department of Housing and Urban Development tracts or opportunity zones). Although this was a rate of lending that tracked the overall market, it still resulted in a substantial number of loans (152,717) being made in census tracts that were generally more distressed than other areas of the country. Similarly, although not a practically significant difference from the market, the average income of the bank’s borrowers (US$84,913) was 8 per cent (or US$7,409) less than the average income of all borrowers in the HHAs (US$92,322). Further, with more than 36 per cent of its loans in HHAs (for a total of 114,171 loans) insured by the FHA, an indicator for a lower-wealth borrower, Deutsche Bank beat the overall mortgage market by 24.5 per cent.
The analysis, moreover, went beyond focusing on the national market and a wide range of states. It also included a review of the characteristics of the bank’s loans and borrowers in the following counties to provide examples of how some individual communities were affected by the settlement agreement: Maricopa County, Arizona; Los Angeles County, California; Broward County, Florida; Camden County, New Jersey; Prince George’s County, Maryland; and Baltimore City, Maryland.
In Baltimore City, Maryland, for example, the bank’s loans went to borrowers with significantly lower incomes than the average borrower in the market (US$52,751 compared to US$90,595, or 58.2 per cent of the overall market), and at significantly higher rates to borrowers with an income at or below 100 per cent, 80 per cent and 50 per cent of LMI. Notably, the bank’s loans went to borrowers with an income at or below 50 per cent of the LMI level 95.2 per cent more frequently than loans originated by the overall market, and to FHA borrowers 76.4 per cent more frequently.
These are just some of the data available to the US DOJ if it were to consider rescinding the Sessions Memorandum and restoring consumer relief provisions and other third-party payments in appropriate settlements. Data from other monitors are also available. For example, the Citigroup monitor, Thomas J Perrelli, provided a detailed analysis in his final report about the consumer relief provided by the bank. As for whether US DOJ should rescind the Sessions memorandum, Mr Perrelli did not take a position. Nevertheless, he helpfully provided the following observations:
As discussed in this Report, the consumer relief provided by this settlement and those like it had many flaws and limitations. Much of the consumer relief likely came too late to address the harms directly caused by the financial crisis. Some of those who received relief likely needed the help less than those who did not receive relief. It is difficult to measure, subjectively or objectively, how much actual help the relief provided to those who received it, and it is possible that in some instances—particularly extinguishment of mortgage debt tied to unoccupied homes—the relief failed to achieve its objectives. And, of course, the total relief provided under all the consumer relief settlements was orders of magnitude smaller than the losses and hardships caused by the 2007–2009 financial crisis.
But those flaws and limitations generally came not from mistakes in the Settlement Agreement but rather from the constraints inherent in trying to address a systemic crisis with discrete settlements. Even the most efficient settlements take effect well after the harms they are meant to address. It takes a long time to investigate or litigate factually and legally complex cases, and then it takes additional time to negotiate settlements to resolve the investigations and lawsuits. Such delays compound the difficulties associated with trying to provide narrowly targeted relief in the midst of uncertain and dynamic circumstances. Trying to help only those who most urgently need help requires assessing how much the potential recipients need it, how urgent their need is, and how likely the relief is to provide the help needed. Even when one can make those assessments, doing so takes time and thus can be self-defeating. Releasing water from firefighting airplanes is less precise than spraying it from firehoses, but when half the houses in a neighborhood are on fire, it may well be better to get the planes in the air and aim the best one can.
And the Settlement Agreement did some real good. Tens of thousands of consumers and many communities across the nation got meaningful help. The consumer relief lowered mortgage debts and monthly payments. It provided much-needed cash to address serious community housing issues. It helped provide rental housing to thousands of people struggling to pay rent from month to month. For many recipients, those are tangible and meaningful benefits that might well not have occurred if not for the Settlement Agreement.
Although the Sessions Memorandum put an end to consumer relief settlements, at least for now, their future use is a question. They were certainly unusual, but they were designed to satisfy a dire need caused by extreme circumstances. To that end, consumer relief provisions included in these settlements helped many people and locations struggling as a result of the financial crisis. In weighing the need for similar consumer relief settlements in the future, the US DOJ will have the benefit of studying and learning from these RMBS settlements and the monitors’ analyses of them.
1 Michael J Bresnick is a partner at Venable LLP. Mr Bresnick expresses his deep gratitude to Venable partners Andrew Bigart and Alexandra Megaris, to Control Risks LLC’s partner Brian Mich and to all members of the Deutsche Bank AG monitorship team for their assistance with this chapter.
2 The US Department of Justice (US DOJ), the US Department of Housing and Urban Development and 49 state attorneys general announced the National Mortgage Settlement with the United States’ five largest mortgage servicers, Bank of America Corporation, JPMorgan Chase & Co, Wells Fargo & Company, Citigroup Inc and Ally Financial Inc (formerly GMAC) in 2012. The National Mortgage Settlement included consumer relief obligations for the settling banks and the selection of an independent monitor.
3 This settlement was announced by the US DOJ and the attorneys general in California, Delaware, Illinois and Massachusetts in 2013.
4 This settlement was announced by the US DOJ and the attorneys general in California, Delaware, Illinois, Maryland, New York and Kentucky in 2014.
5 This settlement was announced by the US DOJ and the attorneys general in California, New York, Delaware, Illinois and Massachusetts in 2014.
6 This settlement was announced by the US DOJ and the attorneys general in California and Illinois in 2016.
7 This settlement was announced by the US DOJ and the Attorney General of Maryland in 2017. The author was selected by the US DOJ as independent monitor of the consumer relief settlement agreement with Deutsche Bank AG (see note 14).
8 This settlement was announced by the US DOJ in 2017.
9 See US DOJ, Press release No. 17-077 (17 Jan. 2017), available at https://www.justice.gov/opa/pr/deutsche-bank-agrees-pay-72-billion-misleading-investors-its-sale-residential-mortgage-backed (last accessed 15 Mar. 2022).
12 In November 2018, the US DOJ filed a lawsuit against UBS for similar misconduct; to date, this case has not been resolved.
13 See 85 Fed. Reg. 81,409 (Dec. 16, 2020); 28 C.F.R. § 50.28.
14 The US DOJ selected Michael J Bresnick to serve as independent monitor following the bank’s US$7.2 billion settlement with the US DOJ in January 2017 for residential mortgage-backed security fraud. As monitor, Mr Bresnick oversaw the bank’s provision of US$4.1 billion in consumer relief. The Office of the Maryland Attorney General also selected Mr Bresnick to serve as independent monitor of Deutsche Bank AG following a later, and related, settlement with the bank that required it to direct US$80 million in consumer relief payments to Maryland residents.
15 The settlement agreement defined hardest hit areas as anywhere within the following 18 states and Washington, DC: Alabama, Arizona, California, Florida, Georgia, Illinois, Indiana, Kentucky, Michigan, Mississippi, Nevada, New Jersey, North Carolina, Ohio, Oregon, Rhode Island, South Carolina and Tennessee.
16 The description below of the monitor’s methodology and results of his analysis are taken in substantial part from the Final Report, available from Mr Bresnick upon request.
17 The US Home Mortgage Disclosure Act (HMDA) requires certain financial institutions to collect and report information about housing-related loans. In his report, the monitor used 2018 HMDA reported data for first lien loans originated for the purpose of purchasing a home. Although the bank financed the origination of loans in 2017, 2018 and 2019, the majority of loans (252,243) were financed in 2018. Further, the HMDA data for loans originated in 2019 were not available at the time the report was drafted. Although the 2018 HMDA data set did not match up perfectly with the periods during which the bank financed loans, the significant overlap provided a sufficient basis for performing the data analysis described in the report. Additional explanations of the monitor’s methodology (for example, excluding from analysis of the total mortgage market loans that could be considered subprime) are described in the Final Report.
18 The statistical analysis was performed by the monitor’s consultant, BLDS, a firm that specialises in applied statistics.
19 The borrowers in HHAs were not required to be of lower wealth and the properties the borrowers purchased there were not required to be in specific distressed census tracts.
20 Unless noted otherwise in the report, data for the economic factors of tracts used in the report were derived from United States Census Bureau’s American Community Survey published data for 2017, which is a carefully weighted and corrected average of the data across five sampled years (2013 to 2017).
21 Declining population is a commonly used metric for measuring economic distress or economic decline.
22 Government loan programmes, especially via the US Federal Housing Administration and United States Department of Agriculture, are typically associated with more economically disadvantaged borrowers.
23 The reference to ‘the bank’s loans’, ‘the bank’s borrowers’ and ‘the bank’s lending’ is made for ease of reference. Deutsche Bank did not make any loans itself but, instead, financed the origination of loans through arrangements with third-party mortgage lenders.
24 In addition to providing more data for each population of loans, the monitor also worked with his consultant Control Risks Group, LLC to create an appendix in the final report that included data regarding interest rate, principal balance, debt-to-income ratio, borrower income, monthly payment amount, loan terms, rate type and geographical location. Similarly, the monitor worked with Control Risks to develop an interactive map accessible online through the monitor’s website that identified the location of each loan submitted by the bank, along with pertinent information such as the amount of the loan. This resource provided the public with a visual guide to the geographical areas in which the loans were made, with the ability to identify loans at the national, state and local levels. The map allowed those interested in the results of the settlement agreement to track how loans were distributed in their communities and in different areas of the country.