A huge crack appeared in the unified front represented by the 50 states' attorneys general (AGs) on Friday when California withdrew from multi-state negations with major banks over their foreclosure practices.   California Attorney General Kamala Harris, who as late as September 25 was described in the LA Times as a key player in the negotiations, announced that she will instead continue her own probe in an attempt to reform bank practices and prevent foreclosures.

The settlement, first made public last March, was between a consortium composed of the 50 state AGs and several federal agencies and five banks which operate subsidiaries servicing the majority of the nation's mortgages.  The banks, Wells Fargo, JP Morgan Chase, Bank of America, Citigroup and Alley Bank (formerly GMAC) have been accused of a number of violations of federal and state laws while pursuing foreclosures against those mortgages. 

The settlement calls for payment by the banks of an amount widely reported to be $20 billion to compensate borrowers harmed by banker/servicer improprieties.  The servicers, in return would be absolved of further legal action from the state and federal parties.   

The settlement document covers a wide variety of topics relating to the relationship between servicers and borrowers, servicers and investors, and servicers and various regulatory groups and makes specific recommendations across a range of concerns.  It envisions the establishment of a third-party monitor selected by the AGs and the Consumer Finance Protection Bureau (CFPB) which will have access to records and can audit servicers' performance; would require servicers set up internal corporate governance procedures to monitor compliance with the settlement agreement, and establish unspecified penalties for future violations.   The servicers would be required to report regularly to both the AGs and the CFPB.

In a letter written to Associate U.S. Attorney General Thomas Perrelli and Tom Miller, Attorney General of Iowa who heads the 50-state consortium, Harris said that the proposed settlement is inadequate for California homeowners.   In the midst of negotiations, she said, foreclosures in her state had surged again and an additional 560,000 Californians had lost their homes.  "It became clear to me," she said, "that California was being asked for a broader release of claims than we can accept and to excuse conduct that has not been adequately investigated.  In return for this broad release of claims, the relief contemplated would allow too few California homeowners to stay in their homes.

"After much consideration, I have concluded that this is not the deal California homeowners have been waiting for."

Harris had been under increasing pressure from powerful players in her state regarding the settlement negotiations.   Last week a newly formed group, Californians for a Fair Settlement, sent a letter to Harris calling on her to reject the settlement on the grounds that it lacked significant principal reduction for troubled California homeowners and has overly broad liability release language that would hamper future investigations into bank practices. 

The group which included union leaders, Lt. Governor Gavin Newsom, U.S. Representative Maxine Waters, and community representatives, called the proposed $20 billion settlement amount "outrageous" and "a figure which might not even be enough to cover damages for the state of California, let alone the entire country."

Several other attorneys general, including those in New York, Delaware, Nevada, Massachusetts, Kentucky and Minnesota, also have criticized the proposed settlement as inadequate, and some have launched their own investigations.

Harris said she would continue the investigation into bank practices that she began several months ago with the establishment of a Mortgage Fraud Strike Force which she has invested with significant investigatory authority.  There will be, she was, thorough look at what has happened and a willingness to expend the time and energy necessary to achieve it.   She also committed to pushing for new legislation that would ensure transparency and eliminate incentives that mitigate borrowers' rights in foreclosure.