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Banks Face Mortgage-Related Inquiry

Zacks Equity Research

The probe into the operation of banks with regard to their mortgage-related practices before the financial crisis continues. Now, it is the turn of The PNC Financial Services Group, Inc. (PNC) and SunTrust Banks, Inc. (STI) to face regulatory inquiry.

In their latest quarterly filings with the Securities and Exchange Commission (:SEC), both PNC Financial and SunTrust revealed that they face mortgage-related investigations from various regulators.

PNC Financial disclosed that the Department of Justice (:DOJ) and the Consumer Financial Protection Bureau (:CFPB) are probing into the mortgage pricing practices of the company as well as National City Corporation – acquired by PNC Financial in 2008.  The allegations include discrimination against protected borrowers. Under the federal law, lenders can be prosecuted for practices that discriminate based on race, color and religion, among others.

Additionally, PNC Financial revealed that it has received a subpoena for information related to foreclosures from the U.S. Attorney's Office for the Southern District of New York. The primary information being sought is claims for foreclosure expenses related to the loans insured or guaranteed by Fannie Mae or Freddie Mac.

For SunTrust, the investigation relates to processing of mortgage-modification applications under the Home Affordable Modification Program (HAMP). The Office of the Special Inspector General for the Troubled Asset Relief Program (:SIGTARP) and the U.S. Attorney's Office for the Western District of Virginia are together probing the company’s loan-modification procedures during 2008–2009.

These regulators allege that SunTrust failed to properly process loan modification applications of mortgages owned by Fannie Mae and Freddie Mac. These agencies accuse the company of misleading borrowers with regard to timelines and other features of the HAMP modification procedure.

Notably, these are among several other lawsuits that PNC Financial and SunTrust face related to their conduct preceding the financial crisis. Given this, at the end of second-quarter 2013, both these companies anticipate legal losses of $400 million each, exceeding their existing litigation reserves.

PNC Financial and SunTrust are the latest banks to reveal that their mortgage practices are under investigation by various law enforcement agencies. Last week, JPMorgan Chase & Co. (JPM) disclosed that it faces investigation by the DOJ and the SEC over the sale of risky residential mortgage backed securities (RMBS). Notably, the DOJ and the SEC have already filed 2 separate civil lawsuits against Bank of America Corp. (BAC) related to the sale of RMBS worth $850 million in 2008.

Following the completion of the investigation, if banks are prosecuted, it will inevitably lead to a further rise in litigation costs and affect the banks’ images as well as financials.

Though the overall impact from such lawsuits is yet to be evaluated, these measures are somewhat reassuring as they are aimed at restraining mortgage-related malpractices. Most importantly, such measures will likely impart the much needed transparency to banking procedures concerning the sale of mortgages.

Currently, PNC Financial carries a Zacks Rank #2 (Buy), while SunTrust carries a Zacks Rank #3 (Hold).

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