BofA to Pay $16.7 Billion to End U.S. Mortgage Probes

Bank of America Corp. agreed to pay almost $16.7 billion to end federal and state probes into mortgage bond sales, the harshest penalty yet related to loans that fueled the 2008 financial crisis.

The settlement, which includes $9.65 billion in cash and $7 billion in consumer relief, resolves civil investigations by government prosecutors, the U.S. said today.

“This constitutes the largest civil settlement with a single entity in history, addressing conduct uncovered in more than a dozen cases and investigations,” Attorney General Eric Holder said at a press conference today in Washington. “The size and scope of this multibillion-dollar agreement go far beyond the ‘cost of doing business.’”

The agreement cements Bank of America’s status as the firm punished hardest for faulty mortgage practices. It eclipses Citigroup Inc.’s $7 billion settlement in July and JPMorgan Chase & Co.’s $13 billion accord in November. Bank of America’s settlement also comes on top of its $9.5 billion deal in March to resolve related Federal Housing Finance Agency claims.

Bank of America expects the settlement to reduce third-quarter pretax profit by about $5.3 billion, or 43 cents a share after tax, the company said today in a statement. The lender reported an $11.4 billion profit for all of last year.

The government said Bank of America and its Merrill Lynch and Countrywide Financial units sold billions of dollars of mortgage securities backed by toxic loans and misrepresented the risks to investors.

The agreement includes a $5.02 billion penalty, $1.8 billion to settle fraud claims related to the sale and origination of mortgages, and more than $900 million to a group of states including New York and California. The bank also agreed to pay $245 million to the Securities and Exchange Commission to resolve two investigations, one that’s part of the Justice Department settlement and another over securities fraud.

The settlement doesn’t release individuals from civil charges or shield the bank from criminal prosecution, the U.S. said. It also excludes a lawsuit in which a judge ordered the company to pay $1.3 billion for defective mortgages, a ruling the bank said it will appeal.

Of the cash portion of the settlement, $4.63 billion earmarked for remediation is probably tax-deductible, while the $5.02 billion penalty isn’t, according to a person with knowledge of the settlement. Consumer relief may not result in tax credits because most of the loans involved have already been written off, said the person, who asked not to be identified because the information wasn’t publicly disclosed.

Consumer Relief

Consumer relief to be completed by August 2018 will include mortgage modifications, home loans for low-income borrowers, affordable rentals, and demolishing abandoned properties in neighborhoods at risk of urban blight, Bank of America said.

Negotiations between the second-largest U.S. lender and the government began in March. They’ve dragged on as prosecutors took a more aggressive stance, seeking to dispel criticism of their efforts to punish misconduct that helped fuel the housing bubble and financial crisis. Talks intensified in late July after the bank acquiesced to demands that it raise its offer, people familiar with the matter have said.

Under Chief Executive Officer Brian T. Moynihan, Bank of America has already booked more than $70 billion in expenses tied to home loans, mostly linked to the disastrous 2008 takeover of Countrywide.

“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,” Moynihan, 54, said in the bank’s statement.