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SunTrust says could face "substantial penalties" in mortgage probe

Feb 25 (Reuters) - SunTrust Banks Inc said it may attract "substantial penalties" from on an ongoing mortgage-related probe and also disclosed a new investigation by the Department of Justice, according to a regulatory filing late Monday.

U.S. Attorney's Office for the Western District of Virginia and Office of the Special Inspector General for the Troubled Asset Relief Program have been investigating SunTrust concerning its participation in a federal mortgage-assistance program.

The agencies have indicated the plan to pursue some form of action and may impose substantial penalties on SunTrust, the company said in the filing with the U.S. Securities and Exchange Commission. ()

The investigations focused on whether the bank harmed borrowers and violated civil or criminal laws by failing to properly process applications for loan modifications under the Home Affordable Modification Program, or HAMP.

"STM continues to cooperate with the investigation and believes that it has substantial defenses to the asserted allegations," the bank said in its annual report filed with the regulators.

Additionally, SunTrust said the Department of Justice notified it in January that it is investigating the bank's origination and underwriting of mortgages SunTrust sold to Fannie Mae and Freddie Mac.

The DOJ and STM have not yet engaged in any dialogue about how this matter may proceed and no allegations have been raised against STM and the investigation is in its preliminary stages, SunTrust said in the filing.

SunTrust also said it is negotiating definitive settlement terms for each of these matters and has certain substantive disagreements with some of the positions being taken by the government.

The bank said the government may sue it alleging deficiencies in its FHA loan origination practices in case SunTrust is unable to reach a definitive settlement agreement.

Atlanta, Georgia-based SunTrust in October agreed to pay nearly $1.2 billion to resolve investigations from several U.S. authorities into its mortgage practices. The claims relate to certain mortgage loans backed by the Federal Housing Administration that the bank made between January 2006 and March 2012, and to problems with its mortgage servicing practices.

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