By Andrew R. Johnson
Ally Financial Inc.'s mortgage subsidiary, Residential Capital
LLC, has reached a tentative deal with the Federal Reserve that
will allow it to end a foreclosure-review program it says is
draining money from its bankruptcy estate, according to a person
familiar with the matter.
Under the deal, ResCap would set aside at least $200 million
that would be distributed to about 230,000 borrowers who were
eligible for a review, this person said. The deal requires approval
from the U.S. Bankruptcy Court.
Representatives of ResCap and the Fed did not immediately
respond to requests for comment on Tuesday. A spokeswoman for Ally
declined to comment.
ResCap's tentative agreement with the Fed stems from foreclosure
reviews that federal banking regulators required mortgage servicers
to conduct under consent orders reached in April 2011. Under the
orders, the servicers were required to hire independent consultants
to review loan files to determine if borrowers were improperly
foreclosed upon.
But consumer groups criticized the program, arguing it padded
the pockets of consultants rather than assisting homeowners.
In January, the Fed and the Office of the Comptroller of the
Currency reached settlements with 13 of the mortgage servicers that
replaced the foreclosure-review program. These servicers, including
Bank of America Corp. (BAC), J.P. Morgan Chase & Co. (JPM) and
Wells Fargo & Co. (WFC), agreed to pay $3.6 billion in cash to
nearly 4.2 million homeowners and provide $5.7 billion in other
relief, such as loan assistance to borrowers.
ResCap was one of only a few mortgage servicers participating in
the foreclosure review process to not reach a settlement.
The company in February asked the U.S. Bankruptcy Court for a
ruling that it could end its participation in the program without
facing legal action from the Fed. The review process, it said, was
draining $300,000 per day from its bankruptcy estate and
diminishing potential returns for creditors. ResCap estimated the
total cost of the program could reach $459 million.
ResCap's request prompted Ally to fire back at its subsidiary,
saying the mortgage firm shouldn't be allowed to skirt its
responsibilities under the foreclosure-review program.
Ally also argued that it should not be held liable for ResCap's
responsibilities under the program if the mortgage subsidiary
failed to meet its obligations.
ResCap, once the country's fifth-largest mortgage servicer and
10th-largest mortgage lender, conducted the bulk of Ally's mortgage
operations before filing for Chapter 11 bankruptcy in May 2012.
Mounting litigation over soured mortgage securities and looming
bond payments led to ResCap's filing, a move intended to help its
parent company, Ally, sever itself from those issues so it can
repay the $17.2 billion bailout it received during the financial
crisis.
Ally is 74% owned by the U.S. government as a result of the
bailout.
Write to Andrew R. Johnson at andrew.r.johnson@dowjones.com