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March 10, 2011 – Sen. Richard Shelby, R-Ala., said in a Senate Banking Committee hearing Wednesday that he's troubled by a draft settlement agreement being negotiated among state attorneys general and the country's five largest mortgage servicers.

The draft agreement, or "term sheet," was sent by the Justice Department on behalf of other federal and state agencies to settle claims of improper foreclosures and other servicing problems. Five House members also wrote Treasury Secretary Tim Geithner warning of the agreement's potentially far-reaching impact on mortgage finance.

The agreement, reported on this week in the American Banker newspaper and others, is described by some as another form of cramdown such as that sought in previous Congresses bySen. Richard Durbin, D-Ill.

If made final, the agreement could result in a loan modification process that requires servicers to forego at least some portion of loan principal for certain delinquent, underwater homeowners. It would also require servicers, upon request, to share results of a required net-present-value test with the Consumer Financial Protection Bureau.

The NPV test would be used to determine whether a loan should be foreclosed on or modified.

Shelby, in opening remarks for yesterday's Senate Banking hearing, said the substance and process detailed in the draft agreement trouble him. He said it would allow the CFPB to get around the legislative process in an effort to advance the administration's agenda and that he wants the Senate Banking Committee to look into it.

The earlier cramdown proposals, which NAFCU fought successfully with other financial industry groups, would have created a process under Chapter 13 of the U.S. bankruptcy code to reduce the interest rate on the remaining loan balance and reduce outstanding principal.

Wednesday's letter to Geithner was signed by Republican Reps. Spencer Bachus of Alabama, Randy Neugebauer of Texas, Pete Sessions of Texas, Scott Garrett of New Jersey and Patrick McHenry of North Carolina. "The breadth and scope of the draft settlement proposal raise significant concerns about its effect on the financial system, as well as concerns that the Administration and state agencies are attempting to legislate through litigation," they wrote.