WASHINGTON Financial penalties extracted from large banks over their mortgage servicing practices may be used for loan modifications, a top Obama administration official said on Monday.
Deputy Treasury Secretary Neal Wolin said he did not have a set timeline for when regulators and a coalition of state attorneys general will forge a settlement with the largest U.S. banks.
Those banks, including Bank of America, JPMorgan Chase, and Wells Fargo, and other mortgage servicers, have been accused of foreclosing on borrowers without having the necessary paperwork in place.
Asked if authorities are considering using penalties to encourage loan modifications, Wolin told the Reuters Future Face of Finance Summit that option is being discussed.
"I think it is possible. I think there are a range of different ways that we have been thinking about this. Where exactly it will rest in the end, I don't know," he said.
Wolin and Federal Deposit Insurance Corp Chairman Sheila Bair, who also spoke at the summit, declined to get into specifics on the settlement talks, citing ongoing negotiations.
Sources familiar with the talks have said regulators so far disagree on the parameters of a settlement.
One proposal being pushed by negotiators looking for the biggest settlement, such as representatives of the new Consumer Financial Protection Bureau, would have the industry pay about $20 billion, according to a source familiar with the matter.
A settlement could contain a potentially huge legal liability for the banks, as they could face a myriad of lawsuits and individual fines without a universal agreement.
Bair said a universal settlement with the regulators and state attorneys general could help banks cope with their litigation risk.
She drew a distinction between banks' "putback" risk. the costs banks may face from investors who force them to buy back loans with faulty underwriting standards, and banks' "mortgage servicing" risk -- which includes whether banks have proper title paperwork and foreclosure documentation.
"On the servicing risk, that is still something we have not gotten to the bottom of," Bair said, adding that she believes a settlement should reduce the threat.