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Bank of America Hit with Record Fine for Mortgage Fraud

mortgagefinancegazette.com | September 7, 2014

MFG’s Joanne Atkin takes a look at the case of Bank of America, which has been ordered to pay almost $17 billion for its involvement in mortgage fraud leading up to and during the global financial crisis.

Bank of America’s unprecedented penalty of $16.65 billion comes on top of a $1.27 million fine it received in July for the so- called High Speed Swim Lane case, which the bank is appealing (see end of this article).

But the bank is not appealing against the multi-billion dollar settlement – the largest civil settlement in American history. This mainly involves toxic mortgages sold by Merrill Lynch and Countrywide Financial Corporation, before Bank of America bought those banks in 2008 just as the global financial crisis was hitting hard.

The 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. This includes, among others, Citibank agreeing to pay a total of $7 billion - $4.5 billion in cash and $2.5 billion in consumer relief. But other big names are being investigated including Royal Bank of Scotland, HSBC and Barclays.

Bank of America’s penalty is broken down into $9.65 billion in cash and $7 billion in helping struggling borrowers. The cash portion consists of a $5.02 billion civil monetary penalty to the US Department of Justice (DoJ) and $4.63 billion in compensation to certain federal agencies, including the Federal Deposit Insurance Corporation and the Securities and Exchange Commission – as well as six US states.

Meanwhile, $7 billion will go in the form of relief to aid hundreds of thousands of consumers harmed by the financial crisis and unlawful conduct of Bank of America, Merrill Lynch and Countrywide. That relief will take various forms, including modifying homeowners' mortgages so they will no longer be in negative equity.

The consumer relief programme 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. Bank of America has also agreed to place $490 million in a tax relief fund that will help defray tax liability as a result of mortgage modification, forbearance or forgiveness. Bank of America has until August 2018 to comply with this part of the agreement.

“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,” said Bank of America's CEO Brian Moynihan.

Selling toxic loans

Bank of America’s misdemeanours involved the securitisation, origination, sale and other issues in relation to residential mortgage-backed securities (RMBS) and collateralised debt obligations (CDOs).

The bank has also conceded that it originated risky mortgages and made misrepresentations about the quality of those loans before selling them to the government sponsored enterprises (GSEs) – Fannie Mae and Freddie Mac – and the Federal Housing Administration (FHA), a US government agency which underwrites and insures loans made by banks and other private lenders for home building.

Bank of America admitted selling billions of dollars of RMBS without disclosing to investors key facts about the quality of the securitised loans. When the RMBS collapsed, investors, including federally insured financial institutions, suffered billions of dollars in losses.

Merrill Lynch

One of the investigations into Merrill Lynch concerned 72 RMBS transactions made in 2006 and 2007 for the District of New Jersey.

Merrill Lynch regularly told investors the loans it was securitising were made to borrowers who were able to repay their debts. But this wasn’t always true. Although Merrill Lynch had carried out due diligence on samples of the loans, it found that a significant number had underwriting and compliance defects – including as many as 55 per cent in a single pool. In addition, Merrill Lynch rarely reviewed the unsampled loans to ensure that defects were not present throughout the remainder of the pools.

On top of that, Merrill Lynch ignored its own due diligence and went ahead securitising loans that the due diligence vendors had identified as defective. This practice led one Merrill Lynch consultant to “wonder why we have due diligence performed” if Merrill Lynch was going to securitise the loans regardless.

Paul J Fishman, US Attorney for the District of New Jersey, commented: “In the run-up to the financial crisis, Merrill Lynch bought more and more mortgage loans, packaged them together, and sold them off in securities – even when the bank knew a substantial number of those loans were defective.

“The failure to disclose known risks undermines investor confidence in our financial institutions. This record-breaking settlement reflects the seriousness of the lapses that caused staggering losses and wider economic damage.”

Bank of America

The settlement also resolves a complaint filed against Bank of America in August 2013 by the US Attorney’s Office for the Western District of North Carolina concerning an $850 million securitisation.

Bank of America acknowledges that it marketed this securitisation as being backed by bank-originated ‘prime’ mortgages that were underwritten in accordance with its underwriting guidelines.

Yet, Bank of America knew that a significant number of these loans were ‘wholesale’ mortgages originated through mortgage brokers and that based on its internal reporting, such loans were experiencing a marked increase in underwriting defects and a noticeable decrease in performance.

Despite these red flags, the bank sold these RMBS to federally backed financial institutions without conducting any third party due diligence on the securitised loans nor disclosing key facts to investors in the offering documents filed with the Securities and Exchange Commission (SEC).

A related case concerning the same securitisation was filed by the SEC against Bank of America and is also being resolved as part of this settlement.

Anne M Tompkins, US Attorney for the Western District of North Carolina, said: “This settlement attests to the fact that fraud pervaded every level of the RMBS industry, including purportedly prime securities, which formed the basis of our filed complaint.

“Even reputable institutions like Bank of America caved to the pernicious forces of greed and cut corners, putting profits ahead of their customers. As we deal with the aftermath of the financial meltdown and rebuild our economy, we will hold accountable firms that contributed to the economic crisis. This settlement makes clear that my office will not sit idly while fraud occurs in our backyard.”


The US Attorney’s Office for the Central District of California investigated the origination and securitisation practices of Countrywide.

Countrywide told investors that it originated loans based on underwriting standards designed to ensure borrowers could repay their loans, even though Countrywide had information that certain borrowers were highly likely to default on their loans.

In addition, Countrywide hid from RMBS investors its use of ‘shadow guidelines’ that allowed loans to riskier borrowers who fell outside its underwriting guidelines (known as ‘exception loans’). As long as the loans could be sold on, Countrywide was willing to originate these loans, knowing they weren't performing well.

Fannie Mae and Freddie Mac

The settlement also resolved claims of misrepresentations concerning the origination of residential mortgages made by Countrywide’s Consumer Markets Division and Bank of America’s Retail Lending Division to Fannie Mae and Freddie Mac. These government sponsored entities (GSEs) buy loans from lenders to sell on to the secondary markets, enabling the lenders to carry on funding new mortgages.

Preet Bharara, US Attorney for the Southern District of New York, said that for years Countrywide and Bank of America had unloaded toxic mortgage loans on Fannie Mae and Freddie Mac while pretending the loans were quality investments.

“This office has already obtained a jury verdict of fraud and a judgment for over a billion dollars against Countrywide and Bank of America for engaging in similar conduct. Now this settlement, which requires the bank to pay another billion dollars for false statements to the GSEs, continues to send a clear message to Wall Street that mortgage fraud cannot be a cost of doing business.”

Acting Inspector General Michael P Stephens, of the Federal Housing Finance Agency – Office of the Inspector General (FHFA-OIG), concluded: “Bank of America and the banks it bought securitised billions of dollars of defective mortgages. Investors, including Fannie Mae and Freddie Mac, suffered enormous losses by purchasing RMBS from Bank of America, Countrywide and Merrill Lynch not knowing about those defects."

He warned: “This settlement is a significant, but by no means final, step by FHFA-OIG and its law enforcement partners to hold accountable those who committed acts of fraud and deceit.”

The separate case of - High Speed Swim Lane – Do the Hussle

In July, Bank of America was ordered to pay a $1.27 billion penalty for mortgage fraud over loans sold by Countrywide Financial Corporation to Fannie Mae and Freddie Mac. The penalty was less than the $2.1 billion sought by the US Department of Justice.

US District Judge Jed Rakoff also fined Countrywide executive Rebecca Mairone $1 million for her ‘leading role’ in the fraud. She was the only person charged.

High Speed Swim Lane (HSSL), also known as ‘the Hussle’, happened between 2007 and 2008 and involved employees eliminating checkpoints, or ‘toll gates’, which had been put in place to ensure the quality of the loans, said the investigators.

Judge Rakoff stated: "While the HSSL process lasted only nine months, it was from start to finish the vehicle for a brazen fraud by the defendants, driven by a hunger for profits and oblivious to the harms thereby visited, not just on the immediate victims but also on the financial system as a whole."

A government expert found that only some of the loans had material defects, while others were acceptable, hence the lesser fine.

Mairone’s lawyer Marc Mukasey said: "Rebecca never intended to defraud anyone and never did defraud anyone. Unfortunately, more powerful people chose her as a scapegoat because they thought she was an easy target. We will fight on to clear her name."

US Attorney Preet Bharara in New York said it was the first case to impose civil penalties against a bank and executive under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) to punish mortgage fraud leading up to the 2008 financial crisis.

The case was originally brought by former Countrywide vice president Edward O'Donnell, a whistleblower who later joined Fannie Mae.

Bank of America is appealing the decision.


Back to September 2014 Archive

CFLA was founded by the Nation's Leading Foreclosure Defense Attorneys back in 2007 to serve the Foreclosure Defense Industry and fight pervasive Bank Fraud. Since opening our virtual doors, CFLA has rapidly expanded to become the premier online legal destination for small businesses and consumers. But as the company continues to grow, we're careful to hold true to our original vision. For us, putting the law within reach of millions of people is more than just a novel idea—it's the founding principle, just ask Andrew P. Lehman, J.D.. With convenient locations in Houston and Los Angeles, you can contact Our National Account Specialist and General Manager / Member Damion W. Emholtz at 888-758-2352 for a free Mortgage Fraud Analysis or to obtain samples of work product, including cutting edge Bloomberg Securitization Audits, Litigation Support, Quiet Title Packages, and for more information about our Nationally Accredited and U.S. Department of Education Approved "Mortgage Securitization Analyst Training Certification" Classes (3 days) 24 hours for approved CLE & MCLE Credit (Now Available Online).

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