Countrywide Settles Predatory Lending Lawsuit- Settlement Establishes First Mandatory Loan Modification Program In The Country

This settlement establishes the first mandatory loan modification program in the country and will serve as a model for other lenders and the federal government for how to help homeowners on the verge of foreclosure.

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Attorney General Lisa Madigan has announced a ground-breaking $8.7 billion settlement in her predatory lending lawsuit against Countrywide home loans, the nation’s largest mortgage lender and servicer. Madigan led the national settlement with California Attorney General Jerry Brown. Nine other states joined the settlement.

“The primary goal of this lawsuit was to keep as many Illinois homeowners in their homes,” Madigan said. “As a result of this settlement, thousands of Countrywide borrowers in Illinois, and hundreds of thousands nationwide, now will be able to modify their loans and remain in their homes.”

Madigan negotiated the settlement with Bank of America, which acquired Countrywide shortly after she filed suit in June 2008. Madigan’s lawsuit alleged that Countrywide engaged in unfair and deceptive conduct by marketing and originating unnecessarily risky and costly mortgage loans for Illinois homeowners.

Under the settlement, which is the largest predatory lending settlement in history, the mandatory loan modification program will provide immediate relief to homeowners who were put into the riskiest types of loans. Nationwide, approximately 400,000 borrowers are expected to receive modifications of their loan at a total cost of $8.4 billion. Approximately 10,750 Illinois borrowers are expected to receive a loan adjustment, representing nearly $185 million in modifications. This is the first mandatory initiative of its kind, contrasting drastically with the voluntary “Hope Now” program operated by the federal government.

“This program will serve as a model for other lenders and the federal government because of its immediate and far-ranging impact,” Madigan said. “Not only will thousands of Illinois borrowers be able to stay in their homes, but our communities and local governments will benefit by reducing the devastating impact that foreclosures have on local real estate values and taxes.”

The Countrywide program will cover borrowers with subprime loans, including hybrid loans with teaser interest rates, and the toxic prime loan product known as the pay-option ARM. For eligible borrowers, the interest rates on the loan modifications could go as low as low as 2.5 percent for five years. Pay-option ARM loans will no longer contain the negative amortization feature and their principal and interest rates will be reduced.

As part of this landmark agreement, Countrywide agreed to implement a range of homeowner relief programs and to drastically modify its future lending practices. Specifically, Countrywide agreed to:

Suspend foreclosures on the riskiest loans to determine if borrowers qualify for modification.

Establish a Foreclosure Relief Fund of $8.5 million for borrowers in subprime and pay option ARM loans who lost their homes due to early payment default or default at the time the interest rate reset. Early payment default is a strong indication that the loan was not underwritten properly and that the homeowner couldn’t afford the loan from the beginning.

Help homeowners through a $1 million relocation assistance program, which will provide payments to homeowners who cannot qualify for a loan modification. The funds will help borrowers relocate if necessary.

Waive loan modification fees and late fees.

Waive prepayment penalties on subprime and pay option arm loans owned by Countrywide.

Waive $1.7 million for the costs incurred in Madigan’s investigation, eliminating taxpayer expense.

The settlement comes in the midst of the unprecedented economic crisis caused by the collapse of the housing market. In July 2008, there were 8,915 foreclosure filings reported in Illinois, up 61 percent from July 2007. The delinquency rates on Countrywide loans in Illinois from 2005 through the first half of 2007 are even higher than Countrywide’s national rates.

Countrywide’s delinquency rates have been devastating for Illinois homeowners and across the country because of the company’s massive presence in the market:

By 2007, Countrywide was both the nation’s largest originator of prime and subprime mortgage loans.

In the first quarter of 2008, Countrywide originated $73 billion in mortgage loans nationally.

At its peak, Countrywide operated approximately 100 retail branches in Illinois and was the largest mortgage lender in the state from 2004-2006, selling approximately 94,000 loans to Illinois consumers in that period.

Countrywide also was the largest seller of high-cost, or subprime, home loans in the Chicago area in 2006, according to a 2007 Chicago Reporter study.

“This settlement holds the number-one mortgage lender in the country accountable for deceptively putting borrowers into loans they didn’t understand, couldn’t afford and couldn’t get out of. These are the very practices that have created the economic crisis we’re currently experiencing,” Madigan said. “I am pleased that Bank of America has worked with us to reach this important settlement. It is incumbent upon all lenders and servicers to continue to look for ways to help homeowners in trouble. At the same time, we must demand that Congress put tighter rules and regulations into place to prevent future crises.”

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