New York Attorney General Eric Schneiderman announces the state’s share of Bank of America’s $16.6 billion fraud settlement. (NYLJ/Rick Kopstein)
In the largest-ever settlement between the U.S. government and a single company, Bank of America Corp. on Thursday agreed to pay $16.6 billion in penalties and consumer relief for selling toxic mortgage-backed securities—a sum that will include approximately $800 million in cash payments and relief for New York consumers.
The bank “knowingly, routinely, falsely, and fraudulently marked and sold these loans as sound and reliable investments,” said Attorney General Eric Holder at a news conference at the U.S. Department of Justice headquarters. “Worse still, on multiple occasions—when confronted with concerns about their reckless practices—bankers at these institutions continued to mislead investors about their own standards and to securitize loans with fundamental credit, compliance, and legal defects.”
The settlement resolves charges by the Justice Department, six states, including New York, the U.S. Securities and Exchange Commission, the Federal Deposit Insurance Corp., and the Department of Housing and Urban Development.
The settlement, which also extends to dealings of subsidiaries Countrywide Financial Corp. and Merrill Lynch, is by far the largest accord the Justice Department has reached with a bank over the 2008 mortgage meltdown.
In the last year, JPMorgan Chase & Co. agreed to a $13 billion settlement while Citigroup reached a separate $7 billion deal.
The government said the civil 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.
But in a statement, Bank of America Chief Executive Officer Brian Moynihan said: “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.”
Under the terms of the deal, Bank of America will pay $9.65 billion in cash and provide $7 billion in consumer relief. According to the bank, the cash portion consists of a $5.02 billion civil monetary penalty and $4.63 billion in compensatory remediation payments.
An independent monitor will determine whether Bank of America is satisfying its obligations under the settlement.
In New York, the bank’s payment translates into $500 million including at least $60 million in interest principal reductions and at least $35 million in donations to legal service providers, housing counselors and land banks.
The state will also get a $300 million cash payment. According to the settlement, the cash payment “shall be used, to the maximum extent possible, for purposes of redeveloping and revitalizing housing and home ownership and rebuilding communities in the state, and for programs intended to avoid preventable foreclosures, to ameliorate the effects of the foreclosure crisis.”
During a Manhattan press conference, New York State Attorney General Eric Schneiderman called the settlement “a powerful message that we are going to hold financial institutions accountable for fraudulent behavior they engaged in. We’re going to hold them accountable for their role in the devastating economic crash of 2008.”
Speaking of the settlement’s local benefits, Schneiderman noted an already-existing “infrastructure” of legal service providers and housing counselors.
“No New Yorker is ever going to lose their home because they didn’t have access to a lawyer or a housing counselor as long as I am attorney general of the state of New York,” he said.
Schneiderman is co-chair of the Residential Mortgage-Backed Securities Working Group, comprised of authorities from various federal agencies and his office.
On the federal government side, negotiations were led by Associate U.S. Attorney General Tony West, a member of the working group.
Bank of America has not commented on who it turned to as outside counsel advising the company, but it did tap Charles Smith, a partner with Skadden, Arps, Slate, Meagher & Flom in the SEC case, according to the agency, as well as Amy Greer, a partner at Morgan, Lewis & Bockius.
Skadden is counsel for Bank of America in a pending case the Department of Justice brought in the Western District of North Carolina in August 2013.
The government said in a 30-page statement of facts that Bank of America knew that a significant number of loans packaged into $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,
Likewise, when discussing Merrill Lynch’s issuance of residential mortgage-backed securities from 2006 to 2007, the statement of facts quoted one internal email from a consultant in the financial institution’s due diligence department.
“[H]ow much time do you want me to spend looking at these [loans] if [the co-head of Merrill Lynch's RMBS business] is going to keep them regardless of issues?” the consultant wrote, later adding, “Makes you wonder why we have due diligence performed other than making sure the loan closed.”