Banks could end up paying out less on suits that sprang out of the housing crisis, due to a recent change in policy announced by the U.S. Department of Justice [1]. According to a memo penned by Attorney General Jeff Sessions on Wednesday, Justice Department attorneys will no longer be allowed to send money to community groups or third-party institutions that weren’t directly harmed by the defendant in question.
Previously, the Department of Justice was able to send such payments to these groups in order to address community blight and other mortgage-related issues in areas impacted by lender wrongdoing. According to Law360, the payments were also used to inflate settlement totals for banks engaged in questionable activity during the housing crisis.
“Sessions’ Wednesday announcement closes off a method that the Obama-era Justice Department had used to leverage corporate settlements to aid in some of its policy goals,” Law360 reported. “Several large bank settlements related to financial crisis-related foreclosure and mortgage-backed servicing practices included grants to community groups that would go to promote affordable housing, mortgage counseling, and relieving neighborhood blight, among other goals.”
The policy change is no surprise, as many Republicans have been critical of the practice, calling the settlement additions “slush funds.” Many even introduced legislation to stop third-party settlement payments in the past.
One such critic, House Judiciary Committee Chairman Bob Goodlatte, R-Virginia, said the act was “systematically subverting Congress’ spending power.”
“Attorney General Sessions’ integrity stands in stark contrast to the behavior of Obama administration officials who used their position to funnel billions of settlement dollars to their political allies,” Goodlatte said.
According to Quyen Truong, Partner at Stroock & Stroock & Lavan LLP, eliminating this ability from the DOJ’s tool belt will likely limit the scope of redress prosecutors can seek from lenders—as well as the amount of money they can ask for in a settlement.
“It certainly has the potential to reduce the amount of settlement payments,” Truong said, “although obviously not the amount that would go to providing redress for the customers affected by the actions directly.”
A good example of the exact settlements the policy shift will affect is that of Deutsche Bank AG. The bank’s $7.2 billion settlement included $4.1 billion in community relief—with at least a portion of the funds going toward outside groups.