Bank of America to pay record sub-prime penalty
The United States government has reached a US$16.65-billion settlement with Bank of America over its role in the sale of mortgage-backed securities in the run-up to the financial crisis, the Justice Department announced Thursday.
The deal calls for the bank, the second-largest in the US, to pay a US$5-billion cash penalty, another US$4.6 billion in remediation payments and provide about US$7 billion in relief to struggling homeowners.
The settlement is by far the largest deal the Justice Department has reached with a bank over the 2008 mortgage meltdown. In the last year, JPMorgan Chase & Company agreed to a US$13-billion settlement, while Citigroup reached a separate US$7-billion deal.
At a news conference, Attorney General Eric Holder said the bank and its Countrywide and Merrill Lynch subsidiaries had "engaged in pervasive schemes to defraud financial institutions and other investors" by misrepre-senting the soundness of mortgage-backed securities. The penalties, Holder said, go "far beyond the cost of doing business".
According to one example laid out by the government, Bank of America knew that a significant number of loans packaged into US$850 million in securities were experiencing a marked increase in underwriting defects.
Notwithstanding the red flags, the bank sold these residential mortgage-backed securities to federally backed financial institutions, the government said in a 30-page statement of facts that is part of the settlement.
In California, Countrywide concealed from investors the company's use of "shadow guidelines" that permitted loans to riskier borrowers than Countrywide's underwriting guidelines would otherwise allow, according to the statement of facts.
In addition, over a period of 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 Preet Bhara, the US attorney for the southern district of New York.
The government said the civil settlement, the largest reached with a single entity, 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.
Bank of America CEO Brian Moynihan said in a statement that the company believes the settlement "is in the best interests of our shareholders and allows us to continue to focus on the future".
Of the US$16.65 billion, almost US$10 billion will be paid to settle federal and state civil claims by entities related to residential mortgage-backed securities, collateralised debt obligations and other types of fraud.
An independent monitor will determine whether Bank of America is satisfying its obligations under the settlement.
"In the run-up to the financial crisis, Merrill Lynch bought more and more mortgage loans, packaged them together and sold them off in securities - even when the bank knew a substantial number of those loans were defective," said US Attorney Paul Fishman, whose jurisdiction covers New Jersey.
"The failure to disclose known risks undermines investor confidence in our financial institutions," Fishman added.