U.S. Justice Dept halts settlements funding outside groups

(Adds Harley-Davidson case)

WASHINGTON, June 7 (Reuters) - The U.S. Justice Department has barred legal settlements in federal investigations that include donating funds to community organizations or other third-party groups, rather than to those directly harmed by the wrongdoing, in a change that could affect banks and other corporations.

Settlement payments must be directed to victims affected by the defendants' actions and then to the federal government, according to a statement on Wednesday by U.S. Attorney General Jeff Sessions. It was the latest action by the Republican Trump administration to end policies put in place by former President Barack Obama, a Democrat.

Such agreements were a feature of several U.S. settlements with banks in the wake of the 2008 financial crisis.

Under Obama, the Justice Department aimed to hold banks accountable for shoddy securities that contributed to the U.S. housing market collapse. From 2013 to 2016, the department reached $46 billion in settlements with U.S. banks that in part directed funds to approved housing aid and other related groups.

In Obama's final weeks in office, the department sued Barclays PLC (LSE: BARC.L - news) over similar claims.

"In recent years the Department of Justice has sometimes required or encouraged defendants to make these payments to third parties as a condition of settlement," Sessions said in a statement. "We are ending this practice and ensuring that settlement funds are only used to compensate victims, redress harm, and punish and deter unlawful conduct."

The change could affect other banks still under federal investigations over mortgage issues such as Credit Suisse Group AG, Royal Bank of Scotland Group PLC, Wells Fargo & Co, UBS Group AG (IOB: 0R3T.IL - news) and HSBC.

Representatives for the banks could not be immediately reached for comment.

Sessions, in a one-page memo dated on Monday, told the nation's 94 U.S. attorney generals they could not make any agreements in civil or criminal cases "that directs or provides for a payment or loan to any non-governmental person or entity that is not a party to the dispute."

Sessions cited three exceptions to the new policy: payments or loans that directly aim to address harm such as to the environment or official corruption; legal or other professional services from the case; and restitution, forfeiture and other payments required by law.

Sessions' memo raises questions about whether the Justice Department will finalize a $12 million settlement against Harley-Davidson Inc announced in August. The company also agreed to stop selling illegal after-market devices that cause its motorcycles to emit too much pollution.

As part of the settlement, Harley agreed to spend $3 million on an unrelated project to reduce air pollution, the Justice Department said in August.

The new policy would likely have barred part of the Environmental Protection Agency's diesel emissions settlement with Volkswagen AG (IOB: 0P6N.IL - news) , which requires the German automaker to invest $2 billion in zero emission vehicle efforts over 10 years. (Reporting by Karen Freifeld in New York and; David Shepardson in Washington; Writng by Susan Heavey and Doina Chiacu; Editing by Chizu Nomiyama, Bernard Orr)