Bank of America agrees to historic $17B settlement of mortgage claims

The Justice Department announced Thursday that it has reached a record-setting $16.65 billion settlement with Bank of America for its role in the 2008 housing crisis. The settlement is the largest ever reached between regulators and a single company.

The deal comes after months of negotiations between the Justice Department and the Bank of America. The Justice Department accused the Charlotte, N.C.-based bank of misleading investors into buying risky mortgage securities. The problems stem largely from Bank of America’s 2008 purchase of Merrill Lynch & Co. and Countrywide Financial Corp.

During negotiations, Bank of America said they could not be held accountable for risky lending practices of Countrywide and Merrill Lynch, but prosecutors said the bank profited from those actions, even threatening to file a lawsuit against the if bank rejected a cash settlement. Bank of America eventually agreed to the settlement, which is approximately equal to the bank’s total profit for the past three years, according to the Wall Street Journal. 

“At nearly $17 billion, today’s resolution with Bank of America is the largest the department has ever reached with a single entity in American history,” said Associate Attorney General Tony West in a statement. “But the significance of this settlement lies not just in its size; this agreement is notable because it achieves real accountability for the American people and helps to rectify the harm caused by Bank of America’s conduct....”

Thursday’s announcement is the latest in a series of major fines for major banks stemming from the housing crisis. In 2012, Bank of America was part of a five-bank settlement of $25 billion for alleged foreclosure processing abuses. In 2013, Bank of America and 12 others paid $9.3 billion in relief to homeowners for foreclosure abuses. In June 2011, the bank paid $8.5 billion in connection to Countrywide mortgages.

Persisting legal troubles have cost Bank of America almost $80 billion thus far, but CEO Brian Moynihan told investors that this would be the last settlement for Bank of America.

“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,” Mr. Moynihan said in a statement Thursday. Bank of America said the settlement could reduce third-quarter earnings by $5.3 billion.

Of the $16.65 billion total, Bank of America will pay approximately $10 billion in cash to settle federal and state civil claims. Of that amount, California, Delaware, Illinois, Kentucky, Maryland, and New York will divide roughly $1 billion to settle claims in the states. Another $7 billion will be given in relief to homeowners, borrowers and communities affected by Bank of America's lending practices. 

Watchdog groups say that the deal doesn't go far enough, calling for more data on investor losses. The Washington-based US Public Interest Research Group (PIRG) pointed out Monday that portions of the deal will be tax deductible.

"To understand how significant the [Bank of America] settlement really is, people need to ask how many billions the bank is allowed to write off as tax deductions, and how much of the announced figure includes 'fake costs' — costs the bank would have incurred anyway to protect its bottom line," Phineas Baxandall, PIRG's senior analyst, told USA Today.

The settlement also doesn't end pending legal cases against individuals. Prosecutors in Los Angeles are preparing to bring a civil case against Angelo Mozilo, the former CEO of Countrywide Financial. Mr. Mozilo previously reached a $67.5 million settlement with the Securities and Exchange Commission for risky lending practices.

Federal prosecutors are now turing their attention to Goldman Sachs and Wells Fargo, whose settlements potentially could top Bank of America's.