The U.S. Justice Department and six state attorneys general have reached a $16.65-billion settlement with Bank of America Corporation to resolve claims that the bank and its former and current subsidiaries, including Countrywide and Merrill Lynch, defrauded investors, government agencies, and hundreds of thousands of customers in a massive scheme that ultimately crippled the U.S. economy. The settlement is the largest civil settlement with a single corporation in U.S. history.
The Justice Department said that the settlement resolves multiple ongoing investigations related to Bank of America’s packaging, marketing, selling, arrangement, structuring, and issuance of residential mortgage-backed securities (RMBS), collateralized debt obligations, and several of the bank’s allegedly fraudulent practices concerning the underwriting and origination of mortgage loans.
An RMBS is essentially a pool of residential mortgage loans that investors can buy into. Many state pension systems bought into Bank of America’s residential mortgage-backed securitized loans unaware of how structurally weak and risky those securities were.
Bank of America acknowledges in the settlement that it sold billions of dollars of RMBS without disclosing to investors key facts about the quality of the securitized loans. When the RMBS collapsed, several state pension funds and other investors lost billions of dollars, threatening the retirement security of millions of Americans.
In addition to the federal government, the states of California, Delaware, Illinois, Kentucky, New York, and Maryland also had claims against Bank of America. Funds returned to the states from the settlement range from $23 million to $300 million.
Bank of America also admitted that it originated risky mortgage loans and made misrepresentations about the quality of those loans to Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA).
Almost $10 billion of the record $16.65 billion resolution will be paid to settle federal and state civil claims. Bank of America will pay a $5 billion civil penalty to settle the Justice Department claims under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA), constituting the largest FIRREA penalty in history. Approximately
$1.8 billion will go to settling federal fraud claims related to the bank’s origination and sale of mortgages. More than $1 billion will go to settling federal and state securities claims by the Federal Deposit Insurance Corporation (FDIC). And $135 million will go to settling claims by the Securities and Exchange Commission (SEC).
About $1 billion will be divided among the six states with claims against Bank of America.
Under the agreement, Bank of America will provide the remaining $7 billion in the form of relief to aid hundreds of thousands of consumers harmed by the financial crisis brought about by misconduct and fraud conducted by Bank of America, Countrywide, and Merrill Lynch.
That relief will help pull homeowners out of underwater mortgages with principal reduction loan modifications that will reestablish significant equity. It will also include new loans to credit-worthy borrowers struggling to get a loan, donations to assist communities in recovering from the financial crisis, and financing for affordable rental housing.
Bank of America has agreed to place more than $490 million in a Tax Relief Fund to be used to help defray some of the tax liability that will be incurred by consumers receiving certain types of relief if Congress fails to extend the tax relief provisions of the Mortgage Forgiveness Debt Relief Act of 2007.