Bank of America and the Justice Department have reached a record settlement of almost $17 billion to end a long-running probe into the marketing and sale of toxic mortgage securities by the bank and particularly its Countrywide Financial and Merrill Lynch units.
For Illinois, the $16.65 billion national settlement means $300 million, $200 million of which will be cash payment to the state's pension system, making it whole for losses sustained as a result of the risky investments. The deal also includes $100 million in consumer relief for struggling Illinois homeowners, according to the Illinois Attorney General's office.
Five other states -- California, Delaware, Kentucky, Maryland and New York -- also participated in the settlement.
“From the beginning, Countrywide played a major part in almost every aspect of fraudulent banking and conduct that contributed to the housing crisis, from shoddy loan originations to discriminatory lending in the African-American and Latino communities to terrible loan-servicing practices and now the fraudulent marketing of mortgage-backed securities,” Illinois Attorney General Lisa Madigan said Thursday.
“Settlements are never admissions of guilt,” Madigan added “However, nobody pays $17 billion when they don’t think there’s some liability.”
Announced Thursday morning, the settlement eclipses what had been a record sum set last year that resolved similar allegations made by federal and state authorities against JPMorgan Chase.
Unlike earlier settlements resulting from the nation's housing meltdown that were designed to help consumers who were wrongly sold mortgages they could not afford, the more recent pacts center on allegations that lenders violated federal and state laws on their marketing and sale to investors of risky mortgage bonds tied to those shoddily made home loans.
Bank of America acquired Countrywide Financial Corp. in 2008 and Merrill Lynch in 2009.
“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,” Bank of America CEO Brian Moynihan said in a statement.
The company said the deal was expected to reduce its third-quarter 2014 pretax earnings by $5.3 billion, or 43 cents a share. Shares were trading at around $15.80 in late morning, up 1.8 percent from Wednesday’s close.
Madigan in 2008 and 2010 filed lawsuits against Countrywide, alleging that the lender engaged in unfair and predatory lending practices. Both cases were settled with Bank of America. The state also was a participant in the landmark $25 billion mortgage servicing settlement with the five largest lenders in February 2012.
The Illinois pension entities that will receive the payments under Thursday's deal and recover their losses are: Illinois Teachers Retirement System, $154.2 million; the State Universities Retirement System, $2.6 million; and the Illinois State Board of Investment, which oversees pension plans for state employees, the General Assembly and judges, $43.2 million.
The consumer relief is not cash but rather credit that Bank of America will receive for arranging mortgage loan modifications and refinancings, among other activities. Funds will also go to reducing blight in hard-hit communities.
U.S. Attorney General Eric Holder noted that because Congress failed to extend the Mortgage Forgiveness Debt Relief Act of 2007, some homeowners who may benefit from the settlement by receiving principal writedowns or short sales, would see a greater tax liability from it. He called on legislators to extend the act. The settlement requires the bank to notify all consumers of the potential tax liability.
Last November, JPMorgan Chase and the department inked a $13 billion national settlement, which included a $100 million payment for Illinois' various pension systems but no consumer relief.
And just last month, Citigroup, Inc., agreed to pay $7 billion nationally, including $84 million to Illinois. About half of that sum was dedicated to consumer relief.
Earlier this summer, it was reported that Holder declined a request to meet with Bank of America CEO Brian Moynihan to draft a settlement, saying that the two sides were still too far apart for a meeting to be productive.
Holder noted Thursday that the settlement does not preclude the possibility of criminal charges against the bank or its employees.