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On Wednesday, Wells Fargo & Company (WFC - Analyst Report) was sued by New York State owing to the bank’s violation of the provisions of $25 billion mortgage-servicing settlement, which was reached in February last year. The settlement was primarily intended for homeowners to avoid foreclosure.

However, Eric Schneiderman, the New York Attorney General (AG) – who had played a major part in the settlement – accused Wells Fargo and Bank of America Corporation (BAC - Analyst Report) of breaching the conditions of the settlement. The AG accused these banking giants of continuing to enforce holdups on borrowers seeking to amend the provisions of their loans.

While BofA has agreed to make certain modifications to satisfy the servicing standards, it seems that Wells Fargo is still stuck in a stalemate. Therefore, Schneiderman filed the lawsuit – in the form of a motion – in a federal court in Washington.

Schneiderman also charged Wells Fargo for violating foreclosure laws and found discrepancies in the letters that Wells Fargo sent to distressed borrowers. Moreover, the AG claimed that the banking major refused to sign any agreement intending to improve its customer services for homeowners at risk of default.

The Background Story

Last year, the AGs of 49 states and federal agencies such as the Department of Justice (DoJ) and the Department of Housing and Urban Development (HUD) made a settlement with five major U.S. banks. This was arguably the largest joint federal-state settlement ever and included JPMorgan Chase & Co. (JPM - Analyst Report), Citigroup Inc. (C - Analyst Report), BofA and Ally Financial Inc.

As per the agreement, these banks were required to lower the loan amount for about 1 million homeowners, who were at a risk of foreclosure. Further, approximately 750,000 borrowers who lost their homes due to foreclosure over the last four years were supposed to receive almost $2,000 in cash. The banks could fulfill the terms of the deal till 2014.

Further, the settlement money of $25 billion received from the five accused banks will expectedly be divided between the regulatory authorities and distresses borrowers. Wells Fargo was supposed to pay $1.01 billion to regulators and $4.34 billion in relief.

Additionally, according to the deal, the banks needed to meet new foreclosure servicing standards such as stricter oversight of foreclosure processing, no foreclosure before the consideration of loan modification and a single-point-of-contact for borrowers, among others.

Conclusion

The $25 million foreclosure deal was a relief for the major U.S. banks who were plagued with litigation hassles ever since the financial crisis began. However, Wells Fargo’s failure to conform to the terms of the settlement will likely raise the bank’s legal expenses. Wells Fargo currently carries a Zacks Rank #3 (Hold).

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