Ally Financial Inc.'s mortgage subsidiary, Residential Capital LLC, received court approval to set aside $230 million to be distributed to borrowers who may have been improperly foreclosed upon under a tentative settlement reached with the Federal Reserve.
U.S. Bankruptcy Judge Martin Glenn said in an order filed in court Wednesday that ResCap has permission to execute a term sheet with the Fed, which would allow the company to end a foreclosure-review program it says has been draining funds for its creditors.
The settlement still requires separate court approval.
The Wall Street Journal reported Tuesday that ResCap had reached a tentative deal with the Fed under which it would set aside at least $200 million that could be distributed to about 230,000 borrowers.
The deal 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 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 shouldn't 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.