Bank of America Corp. has agreed to the largest single settlement between the government and any one company. The agreement resolves claims related to shoddy mortgage originations and securitizations.
The Charlotte, N.C.-based company said Thursday that it reached a $16.65 billion settlement with the U.S. Department of Justice, other federal agencies and six states.
The cash portion of the settlement is $9.65 billion, including a $5.02 billion civil money penalty under the Financial Institutions Reform, Recovery and Enforcement Act and $4.63 billion in compensatory remediation payments.
Another $7 billion will come from consumer relief. This includes loan modifications, principal reduction, forbearance forgiveness and second-lien extinguishments. It also includes lending to low- to moderate-income borrowers and community reinvestment and neighborhood stabilization efforts.
In addition, the non-cash portion will include the demolition of uninhabitable and abandoned properties, remediation and property donations as well as supporting the expansion of available affordable rental housing.
BofA committed to completing the consumer relief by Aug. 31, 2019. An independent monitor will oversee the relief.
The financial services giant has agreed to fund a more than $490 million tax relief fund that will be used to help defray some of the tax liability incurred by tens of thousands of consumers if Congress fails to extend the tax relief coverage of the Mortgage Forgiveness Debt Relief Act of 2007.
In a press release, the Department of Justice called the settlement “the largest civil settlement with a single entity in American history.” The FIRREA penalty was also the largest ever of its kind.
The other government agencies to sign on are the Securities and Exchange Commission, Federal Housing Administration and Federal Deposit Insurance Corp.
The six states — California, which is receiving $300 million; Delaware, where $45 million is going; Illinois, with its $200 million in proceeds; Kentucky, which is in line to receive $25 million; Maryland, where $75 million is headed; and New York, which will get $300 million — are members of the Residential Mortgage Backed Securities Working Group of the Financial Fraud Enforcement Task Force.
The Justice Department said BofA acknowledged in an accompanying statement of facts that it withheld key facts about loan quality to RMBS investors — leading to billions of dollars in losses. BofA also acknowledged similar misrepresentations about loan quality on loans sold to Fannie Mae and Freddie Mac and insured by FHA.
“These loans contained material underwriting defects; they were secured by properties with inflated appraisals; they failed to comply with federal, state, and local laws; and they were insufficiently collateralized,” U.S. Attorney General Eric Holder said in a prepared statement. “Yet these financial institutions knowingly, routinely, falsely, and fraudulently marked and sold these loans as sound and reliable investments.
“Worse still, on multiple occasions — when confronted with concerns about their reckless practices — bankers at these institutions continued to mislead investors about their own standards and to securitize loans with fundamental credit, compliance, and legal defects.”
BofA said the settlement resolves litigation and investigations tied to the securitization, origination, sale and other conduct relating to RMBS and collateralized debt obligations prior to 2009.
A release of claims made under FIRREA covers securitization activity prior to 2009.
An origination release on residential loans sold to private-label MBS covers all loans originated by BofA and its legacy entities and securitized prior to 2009, while an origination release on loans sold to Fannie and Freddie applies to loans sold by BofA or Countrywide Financial Corp. prior to this year.
An origination release on FHA-insured loans covers loans originated by BofA or Countrywide after April 2009 that had claims submitted by the end of last year. A statement from the Department of Housing and Urban Development indicated that $800 million of the settlement resolves FHA fraud claims.
It additionally resolves $200 million in civil claims by the Government National Mortgage Association.
“The settlement does not cover potential criminal claims; potential claims against individuals and certain purported whistleblower actions,” BofA stated.
BofA noted that the O’Donnell case, in which a $1.3 billion penalty was imposed last month, is not impacted by the settlement. However, it does plan to file an appeal with the U.S. Court of Appeals for the Second Circuit.
BofA’s announcement indicated that the claims primarily relate to conduct that occurred at Countrywide and Merrill Lynch prior to its acquisition of both companies.
The Justice Department’s statement referenced 72 Merrill Lynch RMBS from 2006 and 2007, an $850 million prime securitization by BofA, itself, and a “multibillion-dollar recovery” for losses caused by Countrywide’s misconduct.
“We believe this settlement, which resolves significant remaining mortgage-related exposures, is in the best interests of our shareholders, and allows us to continue to focus on the future,” Bank of America Chief Executive Officer Brian Moynihan stated in the announcement.
Third-quarter 2014 earnings will take a $5.3 billion pre-tax hit as a result of the settlement.
