February 5, 2015

Consumers and Communities Get Little from Standard & Poor's $1.375 Billion Settlement

On Tuesday, February 3, Standard & Poor’s Financial Services, LLC reached a $1.375 billion settlement agreement with the US Department of Justice and 19 states and the District of Columbia. This settlement resolves allegations that the credit rating agency defrauded investors by issuing inflated ratings on residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDOs). As a result of the misrepresentations, investors experienced significant losses on RMBS and CDOs purchased between 2004 and 2007, which contributed to the subsequent financial crisis. While S&P has admitted to its wrongdoing, this settlement is a missed opportunity to provide much needed support to struggling families and communities.

Unlike recent settlements with three large banks about their RMBS-related activities, this settlement contains no explicit consumer relief components and only minimal funding to support neighborhood revitalization. While direct consumer relief would not be feasible as S&P never owned or controlled any of the RMBS’ underlying mortgages, funds could have been passed through to the states for that purpose. Similarly, states could have used their funds to expand or continue their neighborhood revitalization and foreclosure prevention activities begun under the 2012 National Mortgage Settlement (NMS), under which states collectively received $2.5 billion. It should be noted that eight of the 20 jurisdictions received more under this settlement than they did under the NMS (see tables below for state breakdowns).

Of the $1.375 billion, half (or $687.5 million) will be paid as a penalty to the federal government under the Financial Institutions Reform, Recovery and Enforcement Act while the remaining half will go to the 19 states and the District of Columbia with $4.5 million set aside for the National Association of Attorneys General’s Financial Services and Consumer Protection Enforcement, Education and Training Fund. With the exception of $2.1 million paid to North Carolina—10 percent of the state’s total receipt—payments to the states were not considered penalties or fines, which could reduce the cost of the settlement to S&P by allowing them to offset their tax liability. S&P has also agreed to comply with the consumer protection statutes of each of the settling states and DC.

The funds for the states and DC will be allocated according to an agreement made among the participants. State-level funding ranges from a minimum of $21.5 million (received by 14 of the 20 participating jurisdictions) up to $210 million allocated to California. California is a significant outlier, however, as Illinois received the second largest distribution of $52.5 million. Eight of the states, including California, have no restrictions on how the funds will be used, simply stating that the money must be paid to the state within 30 days of receipt of instructions from that state’s attorney general. In seven other states, the attorneys general have greater or lesser discretion on how to spend the funds.

Of the states that delineate how to spend the money, most will set aside at least part of their funds to cover litigation fees. Illinois intends to use all its funds to compensate state pension funds that lost money on RMBS, a reasonable use of the money from S&P, considering that the RMBS were at the heart of the case. Delaware, Iowa, and Pennsylvania have stipulated they may also use some of the funds for that purpose while Arizona, Colorado and Maine have general language in the settlement about using the funds for restitution. Eight states set aside money for consumer protection and financial education.

Only Delaware, Maine and Washington include possible funds for neighborhood stabilization. Delaware can use its money to fund “efforts to address the mortgage and foreclosure crisis, financial fraud and deception, and housing-related issues.” Washington, which is the only state to explicitly allocate its funds (90 percent of which will go to the state’s general fund), sets aside $3 million “to remediate the effects of the mortgage and financial crisis.” Maine’s language is the same as Washington’s but is part of a longer list of eligible uses, all of which come at the attorney general’s discretion.

While this latest settlement holds S&P accountable for its role in the recent financial crash, it provides only minimal funding to support neighborhood revitalization and contains no explicit consumer relief components. Although we are now seeing a broader economic recovery, there continue to be households and communities that have been left behind. This settlement is a missed opportunity to provide still-needed assistance to those people and places. To the extent that there may be future lawsuits and settlements with other ratings agencies, we urge state and federal negotiators to allocate proceeds to address the effects of the mortgage and financial crisis that stemmed from the faulty ratings. 

Table 1. S&P Settlement Funds and Activities by State

s&p-full

Table 2. S&P Allocation vs. NMS Allocation and Use by State

s&p allocation

 Read Enterprise’s analyses of previous mortgage settlements:

  • Bank of America’s $7 Billion Consumer Relief Obligation, August 2014
  • Understanding Citi’s Consumer Relief Obligations, July 2014
  • What the JPMorgan Chase Settlement Means for Consumers: An Analysis of the $4 Billion in Consumer Relief Obligations, February 2014
  • States Fall Short on Help for Housing: Six Months after Mortgage Settlement, Less than Half of States’ $2.5 Billion Has Gone for Housing, October 2012

The Enterprise Public Policy team works to safeguard, expand and improve programs that end housing insecurity. Learn more about our public policy efforts.

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