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DOJ Catch of the Week -- Bank of America

Posted  August 22, 2014

This week’s Department of Justice “catch of the week” goes to Bank of America.  Yesterday, the North Carolina based banking giant agreed to pay $16.65 billion to resolve federal and state mortgage fraud claims against the bank and its former and current subsidiaries, including Countrywide Financial Corporation and Merrill Lynch.  It is the largest civil settlement with a single entity in American history.   See DOJ press release.

The groundbreaking settlement puts to an end several of the DOJ’s ongoing civil investigations related to the packaging, marketing and sale of residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDOs), and the bank’s practices concerning the underwriting and origination of mortgage loans.  As part of the settlement, Bank of America acknowledged it sold billions of dollars of RMBS without disclosing to investors key facts about the questionable quality of the securitized loans.  The bank also conceded it originated risky mortgage loans and made misrepresentations about the quality of those loans to Fannie Mae, Freddie Mac and the Federal Housing Administration.

Bank of America will provide $7 billion of the settlement in the form of relief to 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.

In addition, the settlement includes a $5 billion penalty under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) – the largest FIRREA penalty ever – as well as $1.8 billion paid to settle federal fraud claims related to the bank’s origination and sale of mortgages, $1.03 billion to settle federal and state securities claims by the Federal Deposit Insurance Corporation, $135.84 million to settle claims by the SEC, and nearly $950 million to settle claims by a number of states.

The settlement is just the latest in a series of billion dollar settlements in which the government has taken to task the major banks who contributed to the financial crisis.  See The Billion-Dollar Mortgage Fraud Club — New Members Welcome!  This latest settlement brings to roughly $37 billion the total payout the government has recovered from these complicit banks.  And always sensitive to the charge these monetary sanctions alone are insufficient punishment to fit the crime, Attorney General Eric Holder in announcing the settlement trumpeted: “This historic resolution — the largest such settlement on record — goes far beyond ‘the cost of doing business’ [and] is appropriate given the size and scope of the wrongdoing at issue.”  Associate Attorney General Tony West strongly echoed this sentiment: “The significance of this settlement lies not just in its size; this agreement is notable because it achieves real accountability for the American people and helps to rectify the harm caused by Bank of America’s conduct.”

Whether criminal charges will also be brought against the bank or its executives remains to be seen.  The settlement does not absolve Bank of America, its current or former subsidiaries and affiliates or any individuals from potential criminal prosecution.  However, based on the government’s failure to date in seeking criminal charges in this arena, it is unlikely it will go down this path.  The government’s investigation into the fraudulent mortgage practices of Bank of America, Countrywide and Merrill Lynch stemmed in part from several whistleblower lawsuits filed under the qui tam provisions of the False Claims Act.  The whistleblower share of the government settlement has not yet been determined.

Tagged in: Catch of the Week, FCA Federal, FIRREA, Housing and Mortgage Fraud,