Bank of America (BAC) and the U.S. Department of Justice have arrived at a $16.65 billion mortgage settlement. Under the agreement, the lender will pay $9.65 billion to the DOJ, the SEC, other government agencies, and six states. The remaining $7 billion will be paid in the form of aid to struggling consumers. This is the largest settlement between the U.S. and just one company. It resolves claims not just against Bank of America, but also against its current and past subsidiaries, including Merrill Lynch and Countrywide Financial Corporation.
The numerous probes now resolved involve the packaging, sale, marketing, structuring, and issuance of collateralized debt obligations and residential mortgage-backed securities, as well as mortgage loan origination and underwriting practices. As part of the settlement, the bank issued a statement of facts acknowledging that it did not disclose key information to investors about the quality of billions of dollars of RMBS that it sold to them. When the securities failed, investors, including financial institutions that were federally insured, lost billions of dollars. Bank of America acknowledges that it originated mortgage loans that were high-risk and made misrepresentations about the loans to the Federal Housing Administration, Freddie Mac, and Fannie Mae.
Merrill Lynch and Countrywide made a lot of the loans at issue before Bank of America purchased both entities in 2008. However, the government also had a problem with Bank of America’s own mortgage securities, as well as the latter's attempts to circumvent internal underwriting standards by revising the financial data of applicants.
The bank is just one of several lenders accused of knowingly giving credit to borrowers who couldn’t afford the loans and then selling the mortgages to investors. When borrowers defaulted on the loans, they went into foreclosure. This cost investors big time.
As part of the settlement, the bank will pay $5 billion to settle the DOJ claims under the Financial Institutions Reform, Recovery and Enforcement Act. The deal also settles securities claims by the Federal Deposit Insurance Corporation, the states of Illinois, California, Kentucky, Delaware, Maryland, New York, and the U.S. Attorney’s Office for the Western District of North Carolina. The relief to consumers will include principal reduction loan modifications, new loans to credit worthy borrowers, money to help communities still recouping from the financial crisis, and the financing of affordable rental housing.
Meantime, prosecutors in Los Angeles, California are getting ready to file civil charges against former countrywide CEO Angelo Mozilo and other ex-Countrywide executives. The DOJ dropped its criminal probe of Mozilo three years ago. Still, others have sought to hold him responsible for his involvement in the way the mortgages were handled. In 2010 the SEC ordered Mozilo to pay $67.5 million to settle allegations that he misled Countrywide investors. The deal allowed him to avoid going to trial on civil fraud and insider trading charges. Now, also invoking FIRREA, the U.S. attorney’s office in LA is getting ready to sue Mozilo and others.
Bank of America settles mortgage probes for $16.65 billion, Reuters, August 21, 2014
Deal Done: Bank of America, Justice sign $16.7 billion deal over bad mortgages, BizJournals, August 21, 2014
Countrywide CEO Mozilo settles with SEC for $67.5M, The Christian Science Monitor, The Christian Science Monitor/AP, October 15, 2010
Countrywide’s Mozilo Said to Face U.S. Suit Over Loans, Bloomberg, August 20, 2014
More Blog Posts:
Bank of America, Its Ex-CEO To Pay $25M to Settle Securities Case with NY Over Merrill Lynch Deal, Stockbroker Fraud Blog, March 31, 2014
Bank of America Settles Mortgage Bond Claims with FHFA for $9.3B, Institutional Investor Securities Blog, March 29, 2014
Bank of America’s $8.5B Mortgage Bond Settlement Gets Court Approval, Institutional Investor Securities Blog, January 31, 2014