The Justice Department has reached a $16.65 billion settlement with the Bank of America for financial fraud in the lead-up to the housing meltdown, the Justice Department announced Thursday, calling it "the largest civil settlement with a single entity in American history." "Bank of America, Merrill Lynch and Countrywide each engaged in pervasive schemes to defraud financial institutions and other investors in structured financial products known as residential mortgage-backed securities, or RMBS," Attorney General Eric Holder said at a press conference announcing the settlement.
It's the third major settlement that the Justice Department has reached with a Wall Street bank for financial wrongdoing in the leadup to the 2008-2009 meltdown. JPMorgan agreed to a similar $13 billion settlement last November, and Citigroup agreed to pay a $7 billion mortgage settlement last month.
Bank of America will pay $10 billion to settle state and federal claims and will spend the remaining $7 billion on consumer relief measures, including principal reduction for struggling homeowners and financing affordable rental housing. The banking giant acquired both Merrill Lynch and Countrywide during the financial crisis. Holder said that all three financial institutions had "knowingly misrepresented" the quality of the toxic securities they sold to private investors and the government. "These loans contained material underwriting defects; they were secured by properties with inflated appraisals; they failed to comply with federal, state, and local laws; and they were insufficiently collateralized," he said. "Yet these financial institutions knowingly, routinely, falsely, and fraudulently marked and sold these loans as sound and reliable investments." Associate Attorney General Tony West compared the fraud to a neighborhood store that was deliberately selling its customers spoiled products. "They knew the milk you had been buying had been left out on a loading dock unrefrigerated the entire day before, but they never told you about the condition of the milk you're buying," he 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,” Bank of America CEO Brian Moynihan said in a statement. The Justice Department has not singled out or punished any individuals for wrongdoing in the settlements. Holder said the civil settlements do not preclude criminal prosecution of the banks, but the Justice Department has not publicly taken any such actions so far.
Holder also urged Congress to reinstate a tax break that would prevent consumers receiving mortgage help from being taxed on the portion of loans that were forgiven. Congress passed the tax break in 2007 but it expired in December. The Bank of America settlement includes some tax relief for consumers who receive loan forgiveness, but it won't be enough to cover the entire tax burden, Holder said.