Bank of America Corp. agreed to pay almost $16.7 billion to end federal and state probes into mortgage bond sales, the harshest penalty yet related to loans that fueled the 2008 financial crisis.

The settlement, which includes $9.65 billion in cash and $7 billion in consumer relief, resolves civil investigations by government prosecutors, the U.S. said today.

“This constitutes the largest civil settlement with a single entity in history, addressing conduct uncovered in more than a dozen cases and investigations,” Attorney General Eric Holder said at a press conference today in Washington. “The size and scope of this multibillion-dollar agreement go far beyond the ‘cost of doing business.’”

The agreement cements Bank of America’s status as the firm punished hardest for faulty mortgage practices. It eclipses Citigroup Inc.’s $7 billion settlement in July and JPMorgan Chase & Co.’s $13 billion accord in November. Bank of America’s settlement also comes on top of its $9.5 billion deal in March to resolve related Federal Housing Finance Agency claims.

Reduce Profit

Bank of America expects the settlement to reduce third-quarter pretax profit by about $5.3 billion, or 43 cents a share after tax, the company said today in a statement. The lender reported an $11.4 billion profit for all of last year.

Bank of America shares surged the most in more than a year and were the best performer today in the 84-company Standard & Poor’s 500 Financials Index, climbing 4.1 percent to close at $16.16. The stock swung to a gain for the year and is now up 3.8 percent in 2014.

The government said Bank of America and its Merrill Lynch and Countrywide Financial units sold billions of dollars of mortgage securities backed by toxic loans and misrepresented the risks to investors.

“It’s kind of like going to your neighborhood grocery store to buy milk advertised as fresh, only to discover that store employees knew the milk you were buying had been left out on the loading dock, unrefrigerated, the entire day before, yet they never told you,” Associate Attorney General Tony West said during the press conference.

The agreement includes a $5.02 billion penalty, $1.8 billion to settle fraud claims related to the sale and origination of mortgages, and more than $900 million to a group of states including New York and California. The bank also agreed to pay $245 million to the Securities and Exchange Commission to resolve two investigations, one that’s part of the Justice Department settlement and another over securities fraud.


The settlement doesn’t release individuals from civil charges or shield the bank from criminal prosecution, the U.S. said. It also excludes a lawsuit in which a judge ordered the company to pay $1.3 billion for defective mortgages, a ruling the bank said it will appeal.

Of the cash portion of the settlement, $4.63 billion earmarked for remediation is probably tax-deductible, while the $5.02 billion penalty isn’t, according to a person with knowledge of the settlement. Consumer relief may not result in tax credits because most of the loans involved have already been written off, said the person, who asked not to be identified because the information wasn’t publicly disclosed.

Consumer Relief

Consumer relief to be completed by August 2018 will include mortgage modifications, home loans for low-income borrowers, affordable rentals, and demolishing abandoned properties in neighborhoods at risk of urban blight, Bank of America said.

Negotiations between the second-largest U.S. lender and the government began in March. They’ve dragged on as prosecutors took a more aggressive stance, seeking to dispel criticism of their efforts to punish misconduct that helped fuel the housing bubble and financial crisis. Talks intensified in late July after the bank acquiesced to demands that it raise its offer, people familiar with the matter have said.

Under Chief Executive Officer Brian T. Moynihan, Bank of America has already booked more than $70 billion in expenses tied to home loans, mostly linked to the disastrous 2008 takeover of Countrywide.

“We believe this settlement, which resolves significant remaining mortgage-related exposures, is in the best interests of our shareholders, and allows us to continue to focus on the future,” Moynihan, 54, said in the bank’s statement.

Predatory Lending

Countrywide has been blamed by lawmakers and regulators for using lax underwriting standards and predatory lending that fueled its ascent to the biggest U.S. mortgage lender before its collapse and $2.5 billion sale to Bank of America.

In September 2006, Countrywide’s co-founder Angelo Mozilo sent an internal e-mail describing the company’s pay-option adjustable-rate mortgages — which allowed some borrowers to pay less than the monthly interest accrued on the loan — as a “lightening rod” of exotic loans, according to the government’s statement of facts as part of the settlement. He said the company should be moving the loans off its balance sheet by selling them.

“The bottom line is that we are flying blind on how these loans will perform in a stressed environment of higher unemployment, reduced value and slowing home sales,” he wrote in a Sept. 26, 2006, e-mail, cited in the statement of facts.

Next Target

Throughout 2006 and 2007, Countrywide continued to originate pay-option ARM loans and packaged them into mortgage securities, according to the statement of facts. Such loans made up as much as 90 percent of some mortgage bonds sold.

Mozilo and as many as 10 other former Countrywide employees may be prosecutors’ next targets in a civil lawsuit to be filed later this year, Bloomberg News reported yesterday.

The outlines of the settlement were reached July 30 — the same day a federal judge in New York ordered the bank to pay $1.3 billion for defective mortgage loans that Countrywide sold to government-sponsored Fannie Mae and Freddie Mac before the crisis — after a phone call between Holder and Moynihan, a person familiar with the matter has said.

During that conversation, Holder said the government was ready to file a lawsuit in New Jersey if Bank of America didn’t offer an amount closer to the department’s demand of about $17 billion, the person said.

For weeks, the bank hadn’t budged from an offer of about $13 billion, which included at least $5 billion in consumer relief. Negotiations resumed after Citigroup’s July 14 settlement and centered on faulty loans that Bank of America inherited from Countrywide and Merrill Lynch, which it also purchased at the apex of the crisis. Prosecutors demanded more of the penalty be paid in cash instead of other remedies, such as mortgage writedowns and consumer relief, another person has said.

(Source: Bloomberg)