Funding for Legal Assistance and Counseling in State Attorney General Mortgage Settlement

Last week, State Attorneys General, working with the Department of Justice and HUD, announced a much anticipated 49 state, $25 billion settlement  that resolves their investigation into robosigning and other foreclosure process abuses. Participating banks include Ally Financial, Bank of America, Citigroup, JP Morgan Chase and Wells Fargo. While the settlement has not been filed, the top five mortgage servicers agreed to general terms, which include but are not limited to establishing strong mortgage servicing standards, opportunities for principal reductions and refinancing of loans, and financial relief to struggling homeowners.

The largest share of the settlement will be dedicated to financial relief for consumers. Under the terms, $1.5 billion has been set aside to provide some restitution for homeowners who were denied due process when they lost their home to foreclosure processes that were rife with inaccurate and fraudulently created information. Another $20 billion is to be spent by the banks (through credits) by reducing principal for homeowners who are in default on mortgages that are underwater, providing refinancing to home owners who are current on their underwater mortgages, and giving short sale and other relief to struggling consumers. Finally, the mortgage servicers will pay state and federal governments $3.5 billion, $2.7 billion of which will go to state AGs and can and should be used to fund foreclosure relief and housing programs, including housing counseling and legal assistance. While many state attorneys general and state legislators recognize the need for foreclosure prevention counseling and legal services, some may need to be reminded. Recently, Wisconsin Attorney General J.B. Van Hollen announced that Wisconsin will be using their share of the settlement to help the state budget rather than assist troubled homeowners. This is something everyone needs to keep an eye on in their own state.

NACA sees first-hand the important assistance that non-profit legal services and housing counseling groups provide to low-to-moderate income families facing foreclosure.  Funding for legal services and housing counseling is critical to ensure that homeowners obtain the loan modifications and refinances promised in the settlement.  In a nationwide study, homeowners who received counseling were 1.7 times more likely to cure their foreclosure than homeowners who did not receive counseling.  Legal services offices represent homeowners in foreclosure mediation and settlement conference programs, which according to a recent National Consumer Law Center study, has proven to be a successful tool in keeping borrowers in their homes.  Legal services attorneys also defend homeowners in foreclosure actions, raise procedural and substantive defenses to foreclosure, protect homeowners’ rights and prevent illegal foreclosures.

Unfortunately, funding for legal aid and housing counseling is scarce. Congress zeroed out funding for housing counseling in 2011 and subsequently reinstated only about $45 million for the programs in 2012.  Also, cuts in legal aid funding are happening across the board for legal services at the federal, state and local level, as well as reductions in the proceeds from Interest on Lawyers Trust Accounts (“IOLTA”) and a downturn in private giving. NACA managed the Institute for Foreclosure Legal Assistance (IFLA), a nonprofit organization created by the Center for Responsible Lending, which was until recently the largest source of private grants to support foreclosure prevention programs in legal aid. IFLA lost funding in 2011. Without new funding for IFLA, many experienced attorneys lost their jobs and an important source of foreclosure legal assistance that was proven to be highly effective in helping homeowners no longer exists.

Clearly funding for foreclosure legal assistance and housing counseling from the state attorneys general settlement has never been more urgently needed.