WASHINGTON (Reuters) - Republicans are pushing back against a proposed mortgage servicing settlement sent to large banks last week, calling it is an abuse of power that could harm markets.
The 27-page settlement proposal backed by a group of federal regulators and state attorneys general includes a directive to step up efforts to keep borrowers in their homes, including reductions in loan principal.
Leading U.S. House Republicans said on Wednesday they have "significant concerns" about such a settlement, putting their objections in a letter to Treasury Secretary Timothy Geithner.
"The breadth and scope of the draft settlement proposal raise significant concerns about its effect on the financial system, as well as concerns that the administration and state agencies are attempting to legislate through litigation," they wrote.
The settlement proposal is the culmination of a state and federal probe of bank mortgage practices that burst into public view last year, including the use of "robo-signers" to sign hundreds of unread foreclosure documents a day.
Negotiations continue with top the five mortgage lenders: Bank of America Corp, JPMorgan Chase & Co, Citigroup Inc, Wells Fargo & Co and Ally Financial.
Senator Richard Shelby, the senior Republican on the Senate Banking Committee, said the proposed settlement would fundamentally alter the regulation of banks without congressional involvement.
"Instead, it would be done by executive fiat through intimidation and threats of regulatory sanctions," Shelby said in remarks prepared for a committee hearing.
The House letter was signed by Financial Services Committee Chairman Spencer Bachus and panel members Scott Garrett, Randy Neugebauer and Patrick McHenry, according to a spokesman for Garrett.
A chief complaint is that the settlement is an effort to revive the Obama administration's Home Affordable Modification Program, criticized by Republicans as a waste of taxpayer money and due to expire by the end of next year.
The lawmakers' letter asks what legal authority the states and federal agencies have to require principal writedowns without Congress passing new legislation.
They are also critical of the role of the new Consumer Financial Protection Bureau, created under last year's Dodd-Frank financial reform law over the objections of Republicans.
The letter questions whether U.S. Treasury staff setting up the consumer bureau should be involved in enforcement actions against banks before the agency is established.
Republicans have previously complained that a head of the agency has not been nominated and the agency's set-up is being led by presidential adviser Elizabeth Warren, a leading critic of banks during the financial crisis.
In response to the letter, a Treasury spokeswoman said: "The mortgage servicing system we have today is broken, and we should work together to establish a stronger set of standards and best practices."
The 27-page proposal includes how the banks should change their servicing procedures, including providing a single point of contact for borrowers who get behind on their payments.
It did not include a monetary penalty the banks should pay, although at least some of the officials who endorsed the proposal have been pushing for a fine of about $20 billion, which would be used in part to help struggling homeowners.
The settlement proposal has the support of the U.S. Housing and Urban Development Department, the Justice Department, the Federal Trade Commission and Treasury Department staff setting up the Consumer Financial Protection Bureau, according to Iowa Attorney General Tom Miller. Miller is heading up the states' probe of mortgage servicing problems.
Federal bank regulators such as the Office of the Comptroller of the Currency and Federal Reserve did not sign on to the settlement proposal but are part of larger negotiations, including over what penalty banks should pay.
The proposed settlement would require servicers to offer to modify a loan to keep a borrower in their home if doing so would ultimately make the loan more valuable to owners of the mortgage than foreclosing on the property.
Banks have modified distressed home loans by delaying the repayment of principal, but have resisted previous efforts to force them to reduce principal amounts.
"Principal reduction is not a panacea here," Terry Laughlin, Band of America's legacy asset servicing executive, said on Tuesday.
"The fundamental issue here is the borrower does not have sufficient income or their income has been diminished," said Laughlin. "In those cases, principal reduction is not going to help."
Reporting by Dave Clarke and Rachelle Younglai in Washington and Joe Rauch in Charlotte; Editing by Tim Dobbyn