Federal investigators are letting state attorneys general play a prominent role in probing U.S. foreclosure problems, good news for banks seeking to avoid criminal penalties amid allegations they used shoddy paperwork to evict delinquent borrowers from their homes.
The investigation's workload partly reflects the dominance of state law in mortgage matters and also underscores the difficulty of proving banks acted with criminal intent by using so-called "robo-signers" to speed foreclosure proceedings.
Bank of America, JPMorgan Chase, Ally Financial's GMAC Mortgage and Wells Fargo are among the targets of investigators.
"It's difficult for me to imagine a criminal prosecution of a large institution like that," said Edgardo Ramos, a lawyer at Day Pitney LLP in New York and a former federal prosecutor. "There may be an attempt to do the job and do it sloppily, or do it poorly or do it even recklessly, but there's no intent to defraud."
All 50 state AGs formed a joint probe earlier this month to investigate legal documents submitted in foreclosure proceedings. The Justice Department, federal bank regulators, and a task force involving more than 20 federal agencies are also examining the matter.
Iowa Attorney General Tom Miller, who is leading the AG probe, said the feds aren't quite "deferring" to the states on foreclosures, but they "are working very closely with us."
Miller, a Democrat who is in his seventh four-year term as Iowa AG, says that alone is a big change from the Bush — and even the Clinton — administrations.
"This is a different level of cooperation and equality," Miller said.
The alleged foreclosure misconduct involves affidavits filed in state court, which fits neatly into any state AG's portfolio, Miller said, rather than the Justice Department.
The federal government can threaten prison time, but a settlement between the banks and state AGs would likely only involve money, said Scott Harshbarger, a former Massachusetts Attorney General who is now senior counsel with Proskauer in Boston.
"If (banks) can keep the feds out of it, they will," said Harshbarger, who is not representing any clients in the foreclosure mess.
NEW LEVEL OF COOPERATION
Before Attorney General Eric Holder took over in Washington D.C. last year, lawyers in state AG's offices said they rarely heard from the Justice Department.
"There was always a bit of a feeling that the feds picked the best cases, and we were left handling the other ones," Harshbarger said.
Deborah Hagan, chief of the consumer protection division in the Illinois AG's office, said she has been to Washington, D.C. four times this year to discuss different cases with the Justice Department -- including mortgage issues.
"I've been in this office 29 years, and I've never seen the kind of collaboration, and the kind of deference, to what we bring to the table," Hagan said.
Some cases don't lend themselves to criminal sanctions, Hagan said, but state civil penalties can still be a deterrent.
"Large financial penalties can be just as painful as jail time," Hagan said.
Ramos predicted that the banks will face subpoenas from the federal government for what they knew and did in these foreclosure cases, and that the banks will volunteer to improve internal controls to ensure any problems do not happen again.
"Ultimately you will see civil dispositions pursuant to which banks will pay a significant fine and agree perhaps even to a monitor for some period of time," he said.
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