The U.S. Department of Justice has announced that it is filing a civil lawsuit against Bank of America for fraud and misrepresentation. The suit alleges that Bank of America lied to investors about the riskiness of mortgage loans that were pooled into certain residential mortgage-backed securities. The lawsuit 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 residential mortgage-backed securities from Bank of America Mortgage Securities 2008-A (BOAMS 2008-A) securitization.
“Bank of America’s reckless and fraudulent origination and securitization practices in the lead-up to the financial crisis caused significant losses to investors,” U.S. Attorney Anne Tompkins said. “Now, Bank of America will have to face the consequences of its actions. We have made a commitment to the American people to hold financial institutions accountable for practices that violated the law and wreaked havoc on the financial system, and my office takes that commitment very seriously. Our investigation into Bank of America’s mortgage and securitization practices continues.”
The DOJ’s suit accompanied an announcement from the SEC that it also filed charges against Bank of America for defrauding investors. The SEC alleges that Bank of America failed to tell investors that more than 70 percent of the mortgages backing the same mortgage-backed securities offering – the BOAMS 2008-A – originated through the bank’s “wholesale” channel of mortgage brokers unaffiliated with Bank of America entities. Bank of America knew that such wholesale channel loans – described by Bank of America’s then-CEO as “toxic waste” – presented vastly greater risks of severe delinquencies, early defaults, underwriting defects, and prepayment. These risks all directly impact the returns to investors, however Bank of America only selectively disclosed the percentage of wholesale channel loans to a limited group of institutional investors. Bank of America never disclosed this material information to all investors and never filed it publicly as required under the federal securities laws.
I applaud both the Department of Justice and SEC for continuing to demand accountability from those who helped caused the financial crisis. The economy is rebounding and the mortgage market is improving, so it would have been easy to “let bygones be bygones.” However, Bank of America is being called to answer for its actions. Banks got away with a lot, and this won’t right all wrongs, but it’s at least another small portion of justice.