SunTrust in $320 mln settlement of U.S. criminal mortgage probe

By Jonathan Stempel

July 3 (Reuters) - SunTrust Banks Inc, a large U.S. southeast regional bank, will pay as much as $320 million to resolve a criminal probe into its mortgage unit's mismanagement of a federal program designed to help struggling homeowners avoid foreclosure during the recession.

The U.S. Department of Justice on Thursday said SunTrust Mortgage Inc misled homeowners who sought relief through the Home Affordable Modification Program about how long it would take to review their qualifications, and how they would be treated during "trial periods."

As a result, thousands of homeowners suffered harm including damaged credit scores, excess interest payments, and an inability to pursue other options to ease financial stress, the Justice Department said.

The Atlanta-based bank said it "accepts and acknowledges responsibility" for "numerous" shortfalls in administering HAMP from March 2009 through December 2010.

The shortfalls included reporting as many as 75 percent of trial-period customers who were current on their mortgages as being delinquent, and once stacking backlogged, unopened HAMP applications so densely that the floor beneath them buckled.

"SunTrust's mismanagement drove up foreclosures, decimated individual credit and increased costs for hard-working men and women across our nation," Attorney General Eric Holder said in a statement.

"This resolution will provide much-needed restitution for victims," he continued. "It will make available substantial funds to help other homeowners avoid foreclosure. And it will result in the kinds of systemic changes needed to ensure that this will not happen again."

SunTrust on June 17 had reached a $968 million settlement with the Justice Department over other questionable mortgage practices.

In the latest accord, SunTrust will pay at least $179 million, and as much as $274 million, in restitution to harmed borrowers.

It will also pay $10 million to government-controlled mortgage finance companies Fannie Mae and Freddie Mac , $16 million to combat mortgage fraud and $20 million to counsel distressed homeowners. SunTrust will also boost staffing and tighten oversight.

In a statement, SunTrust said it will take a $204 million pre-tax charge in the just-completed quarter for the settlement.

"There were deficiencies in our administration of HAMP during the recession," SunTrust's mortgage chief executive, Jerome Lienhard, said. "Through the improvements we have made to our internal processes and this restitution plan, we are demonstrating our commitment to meet the high standards that we set for ourselves and that our customers expect."

HAMP was part of the Obama administration's effort to address the U.S. housing crisis.

SunTrust Mortgage originates about $30 billion of mortgage loans a year, and its servicing portfolio totals nearly $140 billion, settlement papers show.

The latest SunTrust probe was handled by the office of U.S. Attorney Timothy Heaphy in the Western District of Virginia.

SunTrust shares closed up 58 cents at $40.76 on Thursday.

(Reporting by Jonathan Stempel in New York; Editing by Leslie Adler)