U.S. DEPARTMENT OF JUSTICE – Attorney General Eric Holder and U.S. Attorney for the Western District of North Carolina Anne M. Tompkins recently announced the United States has filed a civil lawsuit against Bank of America Corporation and certain of its affiliates, including Merrill Lynch, Pierce, Fenner & Smith, Banc of America Securities, LLC, Bank of America, N.A., and Banc of America Mortgages Securities, Inc. (collectively “Bank of America”) for investor fraud.
The complaint alleges that Bank of America lied to investors about the relative riskiness of the mortgage loans backing the residential mortgage-backed securities (RMBS), made false statements after intentionally not performing proper due diligence and filled the securitization with a disproportionate amount of risky mortgages originated through third party mortgage brokers.
“These were prime mortgages sold to sophisticated investors who had ample access to underlying data, and we will demonstrate that,” a BofA spokesman said in response to the suit filing Tuesday.
“The loans in this pool performed better than loans with similar charateristics originated and securitized at the same time by other financial institutions,” the response continued.
This Department of Justice (DOJ) announcement is part of the ongoing efforts of President Obama’s Financial Fraud Enforcement Task Force’s RMBS Working Group and is accompanied by an announcement by the Securities and Exchange Commission (SEC) that it has filed civil charges in federal court in Charlotte, N.C. against Bank of America for defrauding investors.
“Today’s investor fraud filing marks the latest step forward in the Justice Department’s ongoing efforts to hold accountable those who engage in fraudulent or irresponsible conduct,”
“As this action proves, President Obama’s Financial Fraud Enforcement Task Force will continue to take an aggressive approach to combating financial fraud and uncovering abuses in the residential mortgage-backed securities market,” said Attorney General Eric Holder.
“Combating investor fraud is a top priority for the Department of Justice. By filing this lawsuit today, we reaffirm an important principle – that everyone must play by the same set of rules, and no institution is too big or too powerful to escape appropriate enforcement. It is also a testament to the cooperation and coordination among the Working Group’s members, as the Justice Department and the SEC brought to bear their collective expertise and resources to build these cases against Bank of America,” Holder added.
Holder said for BofA’s “reckless and fraudulent origination and securitization practices” contributed to the housing crisis and now it’s time to pay the piper.
An RMBS is a bond backed by of a pool of residential mortgage loans that were packaged together and sold in different tranches (or risk-levels) to investors.
The investor fraud civil complaint filed in U.S. District Court in Charlotte alleges that Bank of America defrauded investors, including federally insured financial institutions, who purchased more than $850 million in RMBS from Bank of America Mortgage Securities 2008-A (BOAMS 2008-A) securitization.
The government’s civil complaint also seeks civil penalties from Bank of America under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA).
Investor fraud charges
According to the complaint, in or about January 2008, Bank of America sold BOAMS 2008-A RMBS certificates to investors by knowingly and willfully making materially false and misleading statements and by failing to disclose important facts about the mortgages collateralizing the RMBS, including Bank of America’s failure to conduct loan level due diligence in the offering documents filed with the U.S. Securities and Exchange Commission (SEC).
These misstatements and omissions concerned the quality and safety of the mortgages collateralizing the BOAMS 2008-A securitization, how it originated those mortgages and the likelihood that the “prime” loans would perform as expected.
First, according to the filed complaint, a material number of the mortgages in the BOAMS 2008-A collateral pool failed to materially adhere to Bank of America’s underwriting standards. Specifically, more than 40 percent of the 1,191 mortgages in the BOAMS 2008-A collateral pool did not substantially comply with Bank of America’s underwriting standards in place at the time they were originated and did not have sufficient documented compensating factors.
As alleged in the complaint, Bank of America knew that specific loans in the BOAMS 2008-A collateral pool did not materially adhere or comply with Bank of America’s underwriting standards.
Second, Bank of America did not conduct any loan-level due diligence at the time of securitization. According to the complaint, this was a violation of Bank of America’s own policies, procedures and prior practice, and was contrary to industry standards and investor expectations.
Moreover, this decision allowed Bank of America to keep bad loans in the deal. According to the complaint, these bad loans had a range of glaring origination problems, such as overstated income, fake employment, inflated appraisals, wrong loan-to-value ratios, undisclosed debt, occupancy misrepresentation, mortgage fraud and other red flags wholly inconsistent with a purportedly prime securitization.
As a result of this lack of due diligence, Bank of America had no basis to make many of the representations it made in the offering documents regarding the credit quality of the underlying mortgages.
Finally, Bank of America concealed important risks associated with the mortgages backing the BOAMS 2008-A securitization. For example, Bank of America originated more than 70 percent of the loans through third party mortgage brokers.
These loans, known as “wholesale mortgages,” were riskier than similar mortgages originated directly by Bank of America. More significantly, at the same time Bank of America was finalizing this deal, it was receiving a series of internal reports that showed an alarming and significant decrease in the quality and performance of its wholesale mortgages.
According to the complaint, Bank of America did not disclose that important information or the associated risks to investors.
Investors in the BOAMS 2008-A certificates have already suffered millions of dollars in losses and it is estimated that total losses sustained by investors will exceed $100 million.