NEW YORK - Banks will face stiff penalties and intense public scrutiny if they fail to live up to the standards of a $25 billion mortgage settlement with state and federal authorities, according to court documents filed as part of the deal Monday in federal court in Washington.
While the broad outline of the deal was announced last month, the mechanics of the agreement that took more than a year to negotiate were laid out in the filing, including exactly how much credit the five banks would receive for varying levels of loan forgiveness and just what kind of conduct from the past is off-limits to future investigations.
“We are taking a zero-tolerance approach,’’ one senior Obama administration official said Monday morning, speaking on condition of anonymity because the documents had not yet been filed.
Banks must review their adherence to the new rules every quarter through a random sampling of cases, with a maximum threshold for errors at 5 percent if they are to avoid fines.
“Any error that is found during the sampling process will have to be corrected,’’ the official said.
In some cases, servicers would face civil penalties of up to $1 million for each violation of federal banking law. An independent monitoring and enforcement office is being set up under the agreement, to be paid for by the banks, that will be led by Joseph A. Smith Jr., the former North Carolina banking commissioner.
The complaint, which specifies the terms of the settlement, comes nearly 18 months after reports of “robo-signing’’ and other abuses in the foreclosure process set off a nationwide furor, and marks another legal milestone in the wake of the bursting of the housing bubble and the financial crisis of 2008-09.
Massachusetts’ attorney general, Martha Coakley, said the announcement brings Massachusetts residents closer to receiving millions of dollars in much-needed financial relief for their housing woes.
However, Coakley emphasized that the multistate agreement is just one effort to deal with the state’s foreclosure mess. Last year, Coakley sued the five major banks for their role in the foreclosure crisis and has maintained her right to continue litigating portions of the complaint related to how mortgage companies conducted property seizures. “We continue to pursue additional relief through our own lawsuit and further investigations,’’ Coakley said.
The five banks covered by the settlement - Bank of America, JPMorgan Chase, Wells Fargo, Citigroup, and Ally - engaged “in a pattern of unfair and deceptive practices,’’ according to the complaint. Besides failing to perform modifications for borrowers seeking to ease the terms of their loans, the documents also cite what consumers have been complaining about for years: lost applications and other paperwork, inadequately trained staff, and wrongfully denied modification requests.
Despite the bold talk from administration officials, the settlement covers only mortgages owned by the banks or serviced by them on behalf of private investors. Mortgages held by government-sponsored enterprises like Fannie Mae and Freddie Mac or backed by the Federal Housing Administration, which make up about 56 percent of the $8.8 trillion in US mortgage debt, do not fall under the scope of the accord.
In some ways, the actual filing of the suit by Justice Department lawyers was anticlimactic, coming after a news conference last month with the secretary of the Department of Housing and Urban Development, Shaun Donovan, and the attorney general, Eric Holder. But there has been grumbling since then that the deal did not go far enough.