Bank of America Nears Record Settlement with Justice Department

News outlets are reporting that the U.S. Department of Justice and Bank of America are near agreement on a record civil settlement for actions arising out of the toxic mortgages, which significantly contributed to the financial crisis in the last decade.  Reports indicate that BofA will pay between $16 and $17 billion to settle investigations into its sale of toxic mortgages.  The potential settlement will require BofA to pay the Department of Justice and various federal and state agencies $9 billion in cash.  In addition Bank of America will offer more than $7 billion in relief to customers who are having financial difficulty with their mortgages.

The announced figure represents a significant victory for the Justice Department in its negotiations with Bank of America.  When settlement negotiations first began, the Justice Department demanded a settlement figure of $17 billion with $10 billion in cash.  Bank of America had remained adamant that its cash contribution should be no more that $3 or $4 billion with a maximum settlement of $13 billion including the consumer relief.  BofA appears to have fully capitulated to the Justice Department's demands.

Bank of America had argued for months that it should not be held completely responsible for losses arising from toxic mortgages that resulted from two Bank of America acquisitions, Merrill Lynch and Countrywide Financial.  BofA maintained that the Merrill Lynch acquisition took place at the behest of government regulators and that most of the toxic mortgage issues arising with Countrywide Financial occurred before Bank of America's acquisition of that company.  The Justice Department held to the position that BofA was responsible for the toxic mortgage issues of Merrill Lynch and Countrywide Financial.

Two issues probably precipitated the likely agreement to settle.  First, in a separate case involving Bank of America in the Southern District of New York, the court ordered BofA to pay approximately $1.3 billion.  This case arose out of Bank of America's sale of 17,600 loans, many of which were defective.  The ruling effectively undercut Bank of America's legal argument that it was not responsible for the problems arising out of the toxic mortgages.  The second issue involved the negotiating strategy of the Department of Justice.  Reportedly, last week the Attorney General Eric Holder advised the Bank of America's lawyers that the government was prepared to immediately file suit against the bank.  The United States Attorney for the District of New Jersey had prepared a civil complaint for filing.

Assuming that the settlement agreement becomes final, it will be the largest corporate payment to settle a federal action in the history the United States.  This reported settlement together with other suits against BofA arising out of the mortgage crisis will result in a total settlement value for the bank of about $23 billion.

For in depth articles about the proposed settlement, please see The New York Times,  http://dealbook.nytimes.com/2014/08/06/bank-of-america-nears-17-billion-settlement-over-mortgages/?ref=business, and The Wall Street Journal, http://online.wsj.com/articles/bank-of-america-near-16-billion-to-17-billion-settlement-1407355290?mod=WSJ_hp_LEFTWhatsNewsCollection.

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