Politics & MoneyInvestmentsMortgage

DOJ ordered to stop mortgage settlement money flowing into “left-wing activist organizations”

Republicans accused Obama administration of using money as "slush fund"

For the last few years, some of the largest settlements between financial institutions and the Obama administration’s Department of Justice contained stipulations that portions of the money be sent to unaffiliated third parties, a practice that Republicans criticized as a “slush fund” operation.

Some prominent Republicans, like House Financial Services Committee Chairman Jeb Hensarling, R-TX, said that the Obama administration was using the settlements to funnel money to organizations that were friendly to Democrats.

Back in September, just before the House of Representatives passed a bill limiting the ability of the government to include such stipulations in settlement agreements, Hensarling said that an investigation revealed that the DOJ “used mandatory donations to direct as much as $880 million to political organizations that just so happen to be allies of the Obama Administration.”

But now that Republicans are in charge of the DOJ, that practice is ending, immediately.

On Wednesday, the Department of Justice announced that Attorney General Jeff Sessions issued an order that prohibits the DOJ and all 94 U.S. Attorney’s Offices from including any payouts to unaffiliated third parties in settlement agreements with any company.

According to the DOJ announcement, the practice of the DOJ requiring “settling parties to pay settlement funds to third party community organizations that were not directly involved in the litigation or harmed by the defendant’s conduct” will stop.

As the Wall Street Journal notes, two of the DOJ’s largest settlements over crisis-era mortgage practices, Bank of America’s $16.65 billion settlement and Citigroup’s $7 billion settlement, both included requirements that the banks send money to third parties.

Bank of America’s settlement, for example, included a requirement that the bank provide $7 billion in consumer relief.

But as an announcement from the Department of Housing and Urban Development noted at the time, not all of the consumer relief portion of the settlement goes directly to consumers.

Here’s how HUD described the settlement’s stipulations back in 2014:

Consumer relief will take various forms including loan modification for distressed borrowers, including FHA-insured borrowers, and new loans to credit worthy borrowers struggling to get a loan in hardest hit areas, borrowers who lost homes to foreclosure or short sales, and moderate income first-time homebuyers.

The settlement also required Bank of America will to make donations to “community development funds, legal aid organizations, and housing counseling agencies to assist individuals with foreclosure prevention and to support community reinvestment and neighborhood stabilization and provide financing for affordable rental housing with a focus on family housing in high-cost areas.”

Republicans took issue with those requirements, saying that some of that money was actually being funneled to “left-wing activist organizations,” a phrase used in a September statement issued by Rep. Frank Guinta, R-NH.

Now that practice is over.

“When the federal government settles a case against a corporate wrongdoer, any settlement funds should go first to the victims and then to the American people— not to bankroll third-party special interest groups or the political friends of whoever is in power,” Sessions said in a statement. 

“Unfortunately, in recent years the Department of Justice has sometimes required or encouraged defendants to make these payments to third parties as a condition of settlement,” Sessions continued. “With this directive, we are ending this practice and ensuring that settlement funds are only used to compensate victims, redress harm, and punish and deter unlawful conduct.”

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