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Mother of All Settlements

BoA settles with states for $8.4 billion

October 6, 2008

By MortgageDaily.com staff

Bank of America Corp. will spend mortgage than $8 billion to settle charges of predatory lending at Countrywide Financial Corp.

BoA announced today it has reached agreements with several states to resolve outstanding claims against Countrywide, which it acquired in July. Other states will have the opportunity to join the settlement.

Countrywide faced lawsuits from the State of California, which filed a lawsuit just prior to the acquisition; Illinois, which sued the Calabasas, Calif.-based company on the same day the California lawsuit was filed; West Virginia, which announced in August that it filed a lawsuit; Connecticut, with its attorney general announcing on Aug. 6 that it filed a lawsuit; and Indiana, which filed its own lawsuit in August.

The states claimed that Countrywide disregarded borrowers' ability to repay loans and instead focused only on production and profits.

Today's announcement indicated BoA will provide up to $8.4 billion in interest rate and principal reductions to systematically modify loans for nearly 400,000 troubled borrowers. BoA said it factored in these potential costs when it acquired Countrywide.

Eligible borrowers include those who closed on subprime or pay-option adjustable-rate mortgages prior to Dec. 31, 2007, and occupy the property as their primary residence. Borrowers may already be seriously delinquent or likely to become seriously delinquent because of resets or payment recasts.

Option-ARMs will be eligible for principal reductions. Interest rate reduction can be used on all loans included in the program.

Modifications will be tailored so that the full mortgage payment works out to 34 percent of a borrower's income during the first year. Subsequent payment adjustments will be limited so that increases present minimal risk of payment shock and re-default.

No loan modification fees will be charged, and prepayment penalties will be waived on subprime and option-ARM loans owned by Countrywide or its affiliates. Late fees connected to finalizing modifications under the program will be waived.

"By taking projected foreclosure losses and instead directing those funds into these proactive foreclosure prevention efforts, we create a solution in the best interests of both our customers and the investors whose loans and securities we service," BoA Chief Financial Officer Joe Price said in the statement. "Of the eligible loans, about 12 percent are now held by Bank of America."

The agreement calls for Countrywide to have a servicing program in place by Dec. 31, 2008, to manage the modifications. After that, servicing personnel will proactively reach out to eligible borrowers. Pending foreclosures will be delayed until the loan has been analyzed.

Borrowers who have already lost their home to foreclosure or are at serious risk of foreclosure even though they have made the minimum payments as required, might qualify for payments from a $150 million foreclosure relief program. Another $70 million is being set aside to help borrowers about to lose their homes to foreclosure with the transition.

While the Countrywide settlement is not the first by a subprime lender, it is the biggest.

"In addition to California, attorneys general in 10 states, including Arizona, Connecticut, Florida, Illinois, Iowa, Michigan, North Carolina, Ohio, Texas and Washington, are participating in the settlement," a statement from California Attorney General Edmund G. Brown Jr. today said. "The Countrywide settlement will likely become the largest predatory lending settlement in history."

In 2002, First Alliance Mortgage Co. and its chief executive officer, Brian Chisick, settled with the Federal Trade Commission for $60 million over charging fees of between 10 and 25 percent.

That was followed by a $215 million settlement between the FTC and Citigroup Inc. over alleged deceptive and abusive lending practices by Associates First Capital -- which Citigroup acquired in 2000 and integrated into CitiFinancial. In 2001, Citi agreed to a $20 million settlement with the North Carolina Attorney General over allegations of deceptive practices at Associates.

Also in 2002, Household International Inc. agreed to a $484 million predatory lending settlement with several state attorneys general.

In 2006, in an attempt to assure the confirmation of the late Roland Arnall as ambassador to the Netherlands under the Bush administration, Ameriquest Mortgage Co. agreed to a $325 million settlement with 49 states to resolve charges of alleged predatory lending.

Excluded from the settlement were former Countrywide chairman and CEO Angelo Mozilo and former Countrywide president David Sambol -- California's attorney general said he will still prosecute.

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