WASHINGTON — The Justice Department on Thursday announced a $16.65 billion settlement with Bank of America, a record-setting deal that helps homeowners and ends myriad state and federal investigations triggered by the nation’s mortgage meltdown.
The behemoth package includes a $5 billion civil penalty; $7 billion in various forms of consumer relief; and hefty monetary settlements with six states, including Kentucky and California. Along with other provisions, the complicated settlement amounts to the Justice Department’s largest-ever civil settlement with a single entity.
“I want to be very clear,” Attorney General Eric Holder said at a news conference. “The size and scope of this multibillion-dollar agreement go far beyond the cost of doing business.”
The settlement resolves claims against the Bank of America and its former and current subsidiaries, including Countrywide Financial Corp. and Merrill Lynch. The claims involve the companies’ mortgage loan practices and the packaging and sale of mortgage-backed securities.
Holder said that “when confronted with concerns about their reckless practices – bankers at these institutions continued to mislead investors” and approve “loans with fundamental credit, compliance and legal defects.”
As part of the settlement, Charlotte, N.C.-based Bank of America acknowledged that it sold billions of dollars of the so-called “residential mortgage-backed securities” without disclosing key facts to investors. Investors lost serious money when the market collapsed.
“Bank of America profited by misleading investors about the risky nature of the mortgage-backed securities it sold,” California Attorney General Kamala Harris said in a statement.
Underscoring the national scale of the investigation, federal prosecutors from California, North Carolina and other states flanked Holder at his Justice Department headquarters news conference, along with two state attorneys general.
The global settlement reached following protracted negotiations includes $300 million to settle claims in California and $23 million to settle claims in Kentucky, among other states where pension funds invested in the wobbly mortgage-backed securities.
“This is the first time Kentucky has been in the forefront of this kind of case,” Kentucky Attorney General Jack Conway said in an interview. “It’s a big win for our pension system.”
In a statement Thursday morning, Bank of America said the settlement was expected to reduce the company’s third-quarter earnings by $5.3 billion, or 43 cents per share after taxes. The company noted that the claims relate primarily to “conduct that occurred at Countrywide and Merrill Lynch prior to Bank of America’s acquisition of those entities.”
“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,” CEO Brian Moynihan said in the statement.
The settlement includes payments to resolve claims from different federal agencies, including $1 billion to the Federal Deposit Insurance Corp., and $135.8 million to the Securities and Exchange Commission. It leaves alive the possibility of future criminal charges.
Homeowners could benefit in several ways, particularly those living in regions defined as “hardest hit” by the Department of Housing and Urban Development. These are areas, including California and Florida, with high numbers of vacant or distressed properties and foreclosures.
Under the settlement, Bank of America will provide certain homeowners with loan modifications, reducing both the principal that is owed and the interest rate that is paid. The bank will also offer new loans to credit-worthy borrowers who have been having a hard time getting loans. And it will donate at least $100 million to community development funds, legal aid groups and housing counseling agencies, and provide an additional $100 million in financing for affordable rental housing.
“It requires those we are holding accountable to shoulder some of the responsibility for repairing the damage caused by their conduct,” Associate Attorney General Tony West said.
The settlement includes money set aside to help offset the tax liability that homeowners could face as a result of the mortgage relief they receive. An independent monitor will be appointed to see that Bank of America meets its obligations.
Among the specific cases resolved by the global settlement is one filed against the bank in August 2013 by federal prosecutors in North Carolina. The case involved the sale of mortgage-backed securities that were billed as “prime” even though the bank knew of underwriting defects and poor performance.
“Even reputable institutions like Bank of America caved to the pernicious forces of greed and cut corners, putting profits ahead of their customers,” said Anne M. Tompkins, U.S. attorney for the Western District of North Carolina, who accompanied Holder at the news conference Thursday.
Other key investigations that prompted the settlement announced Thursday were pursued by federal prosecutors in the Central District of California, based in Los Angeles, and in New Jersey.
“All involved Bank of America or its affiliates saying one thing to investors about the quality of the loans they packaged . . . yet in reality knowing the facts indicated something quite different,” West said.