International Financial Law Prof Blog

Editor: William Byrnes
Texas A&M University
School of Law

Thursday, August 21, 2014

Bank of America Pays $16.65 Billion for Financial Fraud - Total Exceeds $23 Billion

Justice logoSee my previous post of August 7 of BOA's trial and appeal loss, leading to this settlement, bring ing the total to more than $23 billion.... 
 
The DOJ has reached a $16.65 billion settlement with Bank of America Corporation – the largest civil settlement with a single entity in American history ­— to resolve federal and state claims against Bank of America and its former and current subsidiaries, including Countrywide Financial Corporation and Merrill Lynch. 
 
The settlement does not release individuals from civil charges, nor does it absolve Bank of America, its current or former subsidiaries and affiliates or any individuals from potential criminal prosecution.

This settlement is part of the ongoing efforts of President Obama’s Financial Fraud Enforcement Task Force and its Residential Mortgage-Backed Securities (RMBS) Working Group, which has recovered $36.65 billion to date for American consumers and investors.

Penalties and Other Payments

Of the record-breaking $16.65 billion resolution, almost $10 billion will be paid to settle federal and state civil claims by various entities related to RMBS, CDOs and other types of fraud. 

Bank of America will pay a $5 billion civil penalty to settle the Justice Department claims under FIRREA. 

  • Approximately $1.8 billion will be paid to settle federal fraud claims related to the bank’s origination and sale of mortgages,
  • $1.03 billion will be paid to settle federal and state securities claims by the Federal Deposit Insurance Corporation (FDIC),
  • $135.84 million will be paid to settle claims by the Securities and Exchange Commission. 
  • In addition, $300 million will be paid to settle claims by the state of California,
  • $45 million to settle claims by the state of Delaware,
  • $200 million to settle claims by the state of Illinois,
  • $23 million to settle claims by the Commonwealth of Kentucky,
  • $75 million to settle claims by the state of Maryland, 
  • $300 million to settle claims by the state of New York,
  • $7.5 billion to consumer relief and consumer tax bills
$7.5 billion to consumer relief and consumer tax bills

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 precipitated by the unlawful conduct of Bank of America, Merrill Lynch and Countrywide.  That relief will take various forms, including principal reduction loan modifications that result in numerous homeowners no longer being underwater on their mortgages and finally having substantial equity in their homes.  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. 

Finally, Bank of America has agreed to place over $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 coverage of the Mortgage Forgiveness Debt Relief Act of 2007.

Settlement for RMBS, CDOs, and Comnsumer Mortgages

The Justice Department and the bank settled several of the department’s ongoing civil investigations related to the packaging, marketing, sale, arrangement, structuring and issuance of RMBS, collateralized debt obligations (CDOs), and the bank’s practices concerning the underwriting and origination of mortgage loans.  The settlement includes a statement of facts, in which the bank has acknowledged 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, investors, including federally insured financial institutions, suffered billions of dollars in losses.  The bank has also conceded 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). 

Independent Monitor

An independent monitor will be appointed to determine whether Bank of America is satisfying its obligations.  If Bank of America fails to live up to its agreement by Aug. 31, 2018, it must pay liquidated damages in the amount of the shortfall to organizations that will use the funds for state-based Interest on Lawyers’ Trust Account (IOLTA) organizations and NeighborWorks America, a non-profit organization and leader in providing affordable housing and facilitating community development.  The organizations will use the funds for foreclosure prevention and community redevelopment, legal assistance, housing counselling and neighborhood stabilization.

Fraudalent Misrepresetations - 55% of loans defective in one pool 

As part of the RMBS Working Group, the U.S. Attorney’s Office for the District of New Jersey conducted a FIRREA investigation into misrepresentations made by Merrill Lynch to investors in 72 RMBS throughout 2006 and 2007.  As the statement of facts describes, Merrill Lynch regularly told investors the loans it was securitizing were made to borrowers who were likely and able to repay their debts. 

Merrill Lynch made these representations even though it knew, based on the due diligence it had performed on samples of the loans, that a significant number of those loans had material underwriting and compliance defects - including as many as 55 percent in a single pool.  In addition, Merrill Lynch rarely reviewed the unsampled loans to ensure that the defects observed in the samples were not present throughout the remainder of the pools.  Merrill Lynch also disregarded its own due diligence and securitized loans that the due diligence vendors had identified as defective.  This practice led one Merrill Lynch consultant to “wonder why we have due diligence performed” if Merrill Lynch was going to securitize the loans “regardless of issues.” 

“For years, Countrywide and Bank of America unloaded toxic mortgage loans on the government sponsored enterprises Fannie Mae and Freddie Mac with false representations that the loans were quality investments,” said U.S. Attorney Preet Bharara for the Southern District of New York.  “This office has already obtained a jury verdict of fraud and a judgment for over a billion dollars against Countrywide and Bank of America for engaging in similar conduct.  Now, this settlement, which requires the bank to pay another billion dollars for false statements to the GSEs, continues to send a clear message to Wall Street that mortgage fraud cannot be a cost of doing business.”

 

What is the RMBS Investigating Group?

The RMBS Working Group is a federal and state law enforcement effort focused on investigating fraud and abuse in the RMBS market that helped lead to the 2008 financial crisis.  The RMBS Working Group brings together more than 200 attorneys, investigators, analysts and staff from dozens of state and federal agencies including the Department of Justice, 10 U.S. Attorneys’ Offices, the FBI, the Securities and Exchange Commission (SEC), the Department of Housing and Urban Development (HUD), HUD’s Office of Inspector General, the FHFA-OIG, the Office of the Special Inspector General for the Troubled Asset Relief Program, the Federal Reserve Board’s Office of Inspector General, the Recovery Accountability and Transparency Board, the Financial Crimes Enforcement Network, and more than 10 state attorneys general offices around the country.

Related Material:

https://lawprofessors.typepad.com/intfinlaw/2014/08/bank-of-america-pays-1665-billion-for-financial-fraud-total-exceeds-23-billion.html

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