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Bank of America to Pay $16.65 Billion in Historic DOJ Settlement for Fraud Leading up to the Financial Crisis

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Financial giant Bank of America will pay $16.65 billion in a settlement following a federal probe into its mortgage practices in the years leading up to the 2008 financial crisis, the Department of Justice announced Thursday.

In a press conference this morning, Attorney General Eric Holder said that the settlement to resolve federal and state claims against BOA and its former and current subsidiaries, including Countrywide Financial Corporation and Merrill Lynch, is the largest civil settlement with a single entity in American history.

As part of this global resolution, the bank has agreed to pay a $5 billion penalty under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) – the largest FIRREA penalty ever – and provide billions of dollars of relief to struggling homeowners, including funds that will help defray tax liability as a result of mortgage modification, forbearance or forgiveness.  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 historic resolution – the largest such settlement on record – goes far beyond ‘the cost of doing business,’” said Attorney General Holder.  “Under the terms of this settlement, the bank has agreed to pay $7 billion in relief to struggling homeowners, borrowers and communities affected by the bank’s conduct.  This is appropriate given the size and scope of the wrongdoing at issue.”

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.

“At nearly $17 billion, today’s resolution with Bank of America is the largest the department has ever reached with a single entity in American history,” said Associate Attorney General West.  “But 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 through a $7 billion consumer relief package that could benefit hundreds of thousands of Americans still struggling to pull themselves out from under the weight of the financial crisis.”

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).

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, and $300 million to settle claims by the state of New York.

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.

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