The U.S. Justice Department And Bank Of America Agree On Record Settlement Amount

Maybe you were away on vacation and missed this. On August 21, the U.S. Justice Department (DOJ) and several states' attorney generals announced the largest civil settlement ever with a single entity.

The $16.65 billion settlement agreement with Bank of America resolves both federal and state civil investigations into activities by the bank's former and current subsidiaries, including Countrywide Financial Corporation and Merrill Lynch, related to the packaging, marketing, sale, and issuance of residential mortgage-backed securities (RMBS). The bank acquired Merrill Lynch in 2009, and Countrywide in 2008.

According to the DOJ announcement, the bank agreed to pay:

"... a $5 billion penalty under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) – the largest FIRREA penalty ever – and provide billions of dollars of relief to struggling homeowners, including funds that will help defray tax liability as a result of mortgage modification, forbearance or forgiveness. The settlement does not release individuals from civil charges, nor does it absolve Bank of America, its current or former subsidiaries and affiliates or any individuals from potential criminal prosecution."

This settlement is part 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 for American consumers and investors. The RMBS Working Group is led by Director Geoffrey Graber and five co-chairs: Assistant Attorney General for the Civil Division Stuart Delery, Assistant Attorney General for the Criminal Division Leslie Caldwell, Director of the SEC’s Division of Enforcement Andrew Ceresney, U.S. Attorney for the District of Colorado John Walsh, and New York Attorney General Eric Schneiderman.

Additional terms of the settlement:

"...includes a statement of facts, in which the bank has acknowledged that it sold billions of dollars of RMBS without disclosing to investors key facts about the quality of the securitized loans. When the RMBS collapsed, investors, including federally insured financial institutions, suffered billions of dollars in losses.."

These losses and other activities contributed to the economic recession during 207 to 2009, from which the country is still trying to recover. Additional terms of the settlement:

"... almost $10 billion will be paid to settle federal and state civil claims by various entities related to RMBS, CDOs and other types of fraud. Bank of America will pay a $5 billion civil penalty to settle the Justice Department claims under FIRREA. Approximately $1.8 billion will be paid to settle federal fraud claims related to the bank’s origination and sale of mortgages, $1.03 billion will be paid to settle federal and state securities claims by the Federal Deposit Insurance Corporation (FDIC), $135.84 million will be paid to settle claims by the Securities and Exchange Commission. In addition, $300 million will be paid to settle claims by the state of California, $45 million to settle claims by the state of Delaware, $200 million to settle claims by the state of Illinois, $23 million to settle claims by the Commonwealth of Kentucky, $75 million to settle claims by the state of Maryland, and $300 million to settle claims by the state of New York."

The settlment includes relief for consumers:

"... $7 billion in the form of relief to aid hundreds of thousands of consumers harmed... That relief will take various forms, including principal reduction loan modifications that result in numerous homeowners no longer being underwater on their mortgages and finally having substantial equity in their homes. It 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.... $490 million in a tax relief fund to be used to help defray some of the tax liability that will be incurred by consumers receiving certain types of relief if Congress fails to extend the tax relief coverage of the Mortgage Forgiveness Debt Relief Act of 2007."

Related announcements were made by several states' attorney generals, including California, Florida, and Maryland. The settlement also resolves an August 2013 complaint against the bank by the U.S. Attorney’s Office for the Western District of North Carolina about $850 million of RMBS activities.

I encourage consumers to read the entire DOJ announcement, the 37-page settlement agreement (Adobe PDF), and the 30-page statement of facts addendum (Adobe PDF). The relief programs and payments to homeowners and consumers are good, but as former U.S. Labor Secretary Robert Reich said in September 2013 on Twitter.com:

"Fines effective only if risk of being caught x probability of being prosecuted x amount of fine > profits to be made."

This wrongdoing by bank executives will stop also when individual bank executives are convicted of fraud and are sent to prison for lengthy periods (with the loss of significant personal assets). Until then, the country will have two sets of laws where poor people who commit crimes and are caught go to prison, while rich people (including bank and corporate executives) who commit crimes and are caught have their employers pay modest fines.

Fraud is fraud. Theft is theft. Consequences need to be consistent. What are your opinions of the settlement agreement?