In a mortgage crisis settlement, did a bank come out easily?

In January, prosecutors reached one of the last multibillion-dollar settlements linked to the 2008 mortgage meltdown. The settlement, with Credit Suisse, required the bank to pay $2.48 billion to settle allegations that its securities unit misled buyers of home loans it sold between 2005 and 2007.

Credit Suisse also agreed to provide $2.8 billion in financial relief to distressed borrowers as part of the settlement by canceling or modifying mortgages and helping fund affordable housing projects across the country.

When they announced the $5.28 billion deal, prosecutors cited it as evidence that the United States government can and will ride up big financial institutions if they err.

“Today’s settlement emphasizes that the Department of Justice will hold accountable the institutions responsible for the 2008 financial crisis,” said then-Attorney General Loretta E. Lynch.

Just over six months later, it’s worth asking: how difficult was the Credit Suisse settlement?

An answer to this question emerges in a new report compiled by the independent monitor hired to examine how Credit Suisse was complying with the terms of the agreement. Simply put, some of the terms of the settlement — those involving consumer assistance — were easier on Credit Suisse than aggrieved investors and borrowers might have wished.

The consumer assistance settlement terms are complex. They allow the bank to get credit for the $2.8 billion in consumer relief by modifying the loans of troubled borrowers. The amount of credit obtained by the bank depends on the types of modifications it grants to borrowers.

One of the controller’s jobs is to ensure that Credit Suisse only receives the credit it actually earned under the agreement. This is not an easy task. Under past settlements, for example, some banks have received credit for forgoing loans that had already gone bankrupt.

Neil M. Barofsky, a partner at Jenner & Block, is Credit Suisse’s monitor. You may remember Mr. Barofsky from his stint as the first Special Inspector General of the Troubled Asset Relief Program, which administered aid to banks, homeowners and other beleaguered entities after the 2008 crisis. .

Mr. Barofsky declined to comment on the report, which examines the first six months of the bank’s loan modification and forgiveness efforts. (A later report will focus on bank financing of affordable housing.)

Credit Suisse spokeswoman Nicole Sharp said in a statement: “As the report highlights, Credit Suisse has taken a number of positive steps since our agreement with the Department of Justice.” She said the bank was preparing to “put this legacy behind it, while protecting the interests of its customers, employees and other stakeholders”.

So far, Credit Suisse is working diligently on the consumer assistance aspect of the settlement, according to the report. It meets the requirements of the agreement through its loan servicing unit, Select Portfolio Servicing or SPS. There is no doubt that the bank’s efforts are helping struggling borrowers and will continue to do so.

Nevertheless, a careful reading of the 118-page analysis raises questions about the real harshness of this regulation. Indeed, the report highlights the significant benefits Credit Suisse received under the terms of an agreement that prosecutors say would hold the bank accountable.

For example, Credit Suisse can get consumer relief credit for actions it likely would have taken anyway, the report notes. Even more troubling, most of the loans that Select Portfolio Servicing will modify – and for which Credit Suisse will receive credit – belong to others. These are investors in mortgage-backed securities or rival financial institutions. “Virtually all loan modifications SPS will make for credit will be made on loans owned by third parties, and to the extent such modifications result in a loss, they will be the responsibility of the loan owner, not Credit Suisse” , notes the report.

Allowing the bank to write off loans it does not own, which the Credit Suisse rules specifically do, puts the bank in a position to benefit from the losses of others.

Here are the details. According to the analysis, Credit Suisse’s current goal is to modify distressed loans, allowing borrowers to pay less than is currently owed on their mortgages or to defer payments on some of the outstanding principal. Both arrangements help borrowers stay home and avoid foreclosure. This was one of the main objectives of the regulations, and it was a good objective.

The bank has agreed to try to meet its consumer assistance obligation by December 31, 2020.

When Credit Suisse cancels the principal of a borrower’s mortgage, modifying the loan by reducing the amount owed, the bank receives dollar-for-dollar credit, the report notes. In other words, for every dollar of principal canceled under an amendment, Credit Suisse receives at least $1 of credit towards the $2.8 billion in consumer relief.

But Credit Suisse can also earn more than $1 in credit when a loan modification meets certain other criteria.

Many struggling borrowers, especially those who bought their homes during the height of the housing bubble, owe more on their mortgages than their properties are currently worth. These borrowers are upside down on their mortgages; they have negative equity in their homes.

To help borrowers like these, the settlement awards additional credit to Credit Suisse when it forfeits enough principal on a loan to put the borrower in a positive capital position. The bank may earn additional credit of up to $1.25 per dollar of rebate granted in certain cases.

The report is significant because it meticulously details how the agreement with Credit Suisse works. This allows readers to draw their own conclusions about how thoroughly the settlement actually held the bank accountable.

After the 2008 debacle, prosecutors were criticized for failing to bring criminal charges against large and powerful financial institutions. In response, they pointed to billion-dollar settlements with banks, such as the one with Credit Suisse, as evidence that they are aggressive in their demands for accountability.

But letting a bank receive credit for the remission of principal that others actually provide is a loophole in this regulation. Allowing him to fulfill his obligations with actions he would have taken anyway is another mistake.

Credit Suisse is abiding by the terms of the $5.28 billion settlement agreement. It’s for the good. But the nature of the agreement could have been stronger. And that’s too bad.