NEW YORK (TheStreet) -- New York Attorney General Eric Schneiderman announced Wednesday that he is suing Wells Fargo (WFC - Get Report) for its alleged failure to adhere to the terms of the $25 billion national mortgage settlement.
Shares of Wells Fargo were down 1% in morning trading at $41.06. Shares of Bank of America were trading flat to slightly lower at $13.89.
Schneiderman said in May that he intended to sue the two banks for failing to adhere to servicing standards established by the mortgage settlement in early 2012 to help struggling borrowers. Under the settlement, the nation's five largest servicers - Bank of America, Wells Fargo, JPMorgan Chase (JPM - Get Report), Citigroup (C - Get Report) and Ally Financial agreed to provide billions of dollars in relief through refinancing, loan modifications, principal reductions and short sales, following allegations of illegal foreclosure proceedings.
The settlement outlined more than 300 servicing standards that required the banks to respond to borrowers in a timely manner and make it easier for homeowners seeking relief.
While the banks have been working toward meeting their relief targets under the agreement, the settlement monitor Joe Smith reported earlier this year that the volume of consumer complaints has increased, with many borrowers citing confusion over modification process and the lack of timely responses from banks.
Those violations increased the likelihood that distressed borrowers would default because the longer modifications were delayed the deeper they fell behind their payments, ultimately pushing them into foreclosure.
"While we have brought much needed relief to thousands of New Yorkers, too many homeowners in our state are facing unnecessary challenges as they fight to keep their homes," said Schneiderman in a statement. "While Bank of America has chosen to work with us to take the steps required to adhere to their commitments, Wells Fargo has taken a different path. Both of these cases should send a strong message that the big banks must comply with the legally binding Servicing Standards negotiated in the National Mortgage Settlement, or face the consequences."
Bank of America said it has been working with the New York AG's office to review inquiries from New York homeowners over the past few months, which led to an agreement to enhance its loan modification process.
The bank will provide client relationship managers for authorized non-profit housing counseling services and establish a bank-NYAG working group to review and discuss issues relating to loan modification on a regular basis.
It also said it will roll out the protocols in the agreement to other states where applicable.
"We're pleased to resolve without litigation the matters brought forward by the New York Attorney General related to loan modifications and other assistance mortgage servicers provide homeowners in need of assistance," Bank of America spokesman Dan Frahm said in a statement. "Together with the broader work of the National Mortgage Settlement Monitoring Committee, these enhancements will continue to improve the experience for our eligible customers and groups working on their behalf, including housing counselors."
The bank has 120 days to implement the changes.
Wells Fargo, on the other hand, did not strike a similar agreement. According to the New York Times report, the bank disagreed with the attorney general's allegations.
In a statement, the bank said it was disappointed in the AG's decision to sue the bank. "We are continuously implementing additional customer-focused measures based on the constructive feedback we receive from our customers, the Monitoring Committee and individual states, including New York," the bank said in a statement. "We believe this collaborative approach -- not protracted litigation --offers the best path toward continuing to improve services to borrowers. We are doing everything we can to help our customers remain in their homes, and over the last four years have completed more than 880,000 loan modifications nationwide including 26,000 modifications for borrowers in New York. That means we have done six modifications for every one foreclosure sale in the state since the beginning of 2009."
Other state attorneys generals, including Massachusetts AG Martha Coakley, are likely to follow Schneiderman's lead, according to press reports.
-- Written by Shanthi Bharatwaj New York.
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