Bank of America Sued by SEC, DOJ over 2008 MBS

Bank of American (BOA) was chargedrnalong with two of its subsidiaries on Tuesday with defraudingrninvestors who bought residential mortgage-backed securities (RMBS)rnfrom the firm. The Securities and Exchange Commission (SEC) allegesrnthat the bank failed to tell investors that more than 70 percent ofrnthe mortgages backing the offer – called BOAMS 2008- posed vastlyrngreater risks to the investors.</p

SEC said in its complaint, filed inrnU.S. District Court for the Western District of North Carolina inrnCharlotte where BOA is headquartered, that the bank, along with Bancrnof America Securities LLC (now Merrill Lynch, Pierce, Fenner &rnSmith) and Bank of America Mortgage Securities (BOAMS) conducted thern$855 million RMBS offering in 2008.  It was promoted as arn”prime” securitization appropriate for the most conservative RMBSrninvestors during a time when such wholesale channel loans were beingrndescribed by the Bank’s then current CEO as “toxic waste.” </p

SEC contends the loans carried greater risks of severerndelinquencies, early defaults, underwriting defects, andrnprepayments, all of which would directly impact the returns to thernRMBS investors, SEC said. BOA “only selectively disclosed thernpercentage of wholesale channel loans to a limited group ofrninstitutional investors.  Bank of America never disclosed thisrnmaterial information to all investors and never filed it publicly asrnrequired under the federal securities laws.'</p

“In its own words, Bank of America ‘shifted the risk’ ofrnloss from its own books to unsuspecting investors, and then ignoredrnits responsibility to make a full and accurate disclosure to allrninvestors equally,” said George S. Canellos, Co-Director of thernSEC’s Division of Enforcement.  “This is one in a long linernof RMBS-related enforcement actions brought by the SEC to holdrnentities accountable for wrongdoing connected to the financialrncrisis.”</p

The Department of Justice today announced a parallel civil actionrnagainst Bank of America for violations of the Financial InstitutionsrnReform, Recovery, and Enforcement Act of 1989 (FIRREA). </p

Investors were allegedly told the loans were underwriten inrnconformity with the bank’s own guidelines however SEC says they werern’riddled with ineligible appraisals, unsupported statements ofrnincome, misrepresentations regarding owner occupancy, and evidence ofrnmortgage fraud.‘ Such key variables as debt-to-income rations andrnloan-to-value rations were routinely miscalculated as well. </p

The complaint says that BOAMS 2008-A suffered an 8.05 percentrncumulative net loss rate through June 2013, the greatest loss rate ofrnany comparable BOAMS securitization. This resulted in losses ofrnnearly $70 million and anticipated future losses of approximately $50rnmillion. </p

According to Reuters NewsrnAgency the lawsuit is seeking a permanent injunction against similarrnviolations, civil penalties and “disgorgement of ill-gottenrngains.”

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