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From Securities Regulation Daily, March 27, 2014

BofA and FHFA settle RMBS row for over $9 billion

By Mark S. Nelson, J.D.

Bank of America Corporation (BofA) said that it has agreed to pay $6.3 billion to settle cases brought by the Federal Housing Finance Agency (FHFA), the conservator for Fannie Mae and Freddie Mac, which alleged the bank’s residential mortgage-backed securities (RMBS) business broke securities laws. BofA made the announcement in its SEC filings late yesterday. An FHFA press release put the aggregate settlement amount at $9.33 billion, which includes the resolution of four court cases against BofA and the bank’s purchase of RMBS from Fannie Mae and Freddie Mac.

BofA also said yesterday that it will hike the quarterly dividend its pays on its common shares to $0.05 per share, and that its board had signed-off on a plan to rebuy $4 billion of its common shares. BofA’s settlement with the FHFA and its dividend and buyback plan announcements came on the same day that the Fed announced that BofA was one of 25 bank holding companies (BHCs) whose capital plans the Fed did not object to as part of the Fed’s Comprehensive Capital Analysis and Review (CCAR).

FHFA Director Melvin L. Watt praised the settlement with BofA. “FHFA has acted under its statutory mandate to recover losses incurred by the companies and American taxpayers and has concluded that this resolution represents a reasonable and prudent settlement of these cases.”

Watt also said prospective homebuyers may benefit from the “certainty” the settlement can bring to the mortgage market. “This settlement also represents an important step in helping restore stability to our broader mortgage market and moving to bring back the role of private firms in providing mortgage credit.”

RMBS settlement. The BofA-FHFA settlement resolves four cases brought by the FHFA against BofA in federal courts in New York and California. These cases alleged that BofA misrepresented that the loans backing private-label RMBS met regulatory standards. According to BofA, the settlement involves nearly $57.5 billion in loans (measured by their purchase cost) bought by Fannie Mae and Freddie Mac. BofA also will buy some RMBS with a fair market value of nearly $3.2 billion. The settlement includes claims against Countrywide Financial and Merrill Lynch & Co., which BofA acquired during the 2008 financial crisis.

BofA said the settlement would cut its Q1 2014 income by $3.7 billion (pretax), which translates into $0.21 per common share (after tax). BofA also said its Basel 3, Tier 1 common equity capital ratio will be consistent with its ratio as of Q4 2013, using the standardized approach.

BofA reiterated its prior disclosures that it still may be the target of federal and state investigators, including the U.S. Department of Justice, state attorneys general, and the RMBS Working Group of the Financial Fraud Enforcement Task Force. BofA said in its 2013 Form 10-K that federal agencies may step-up their use of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) and the False Claims Act (FCA) to bring actions against mortgage lenders. BofA noted that FIRREA fines can exceed $1 million per violation and that treble damages can be awarded under the FCA. BofA cited as an example, a civil investigation of lenders under the Federal Housing Administration’s Direct Endorsement Program that is being pursued by the U.S. Attorney’s Office for the Eastern District of New York.

Stress tests. The Fed told BofA and 24 other BHCs that it would not object to their capital plans after conducting stress tests required under the Fed’s latest CCAR report. But the Fed had qualitative objections to the capital plans pitched by Citigroup Inc., HSBC North America Holdings Inc., RBS Citizens Financial Group, Inc., and Santander Holdings USA, Inc. Zions Bancorporation’s capital plan failed to meet the Fed’s 5-percent, post-stress Tier 1 common ratio.

BofA CEO Brian Moynihan said the bank’s dividend and repurchase announcement was the product of several years’ planning to return capital to its shareholders. “We know that increasing the common dividend is important to our shareholders and we are pleased that we can continue to return excess capital through both repurchases and dividends,” said Moynihan.

Separately, BofA said it had agreed to pay $15 million to settle a suit by the New York Attorney General over the bank’s alleged failure to disclose losses at Merrill Lynch before the bank’s 2008 acquisition of Merrill Lynch. BofA also said it will adopt related corporate governance changes.

Companies: Bank of America Corp.; Federal Housing Finance Agency; Fannie Mae; Freddie Mac; Citigroup Inc.; HSBC North America Holdings Inc.; RBS Citizens Financial Group, Inc.; Santander Holdings USA, Inc.; Zions Bancorporation; Merrill Lynch & Co.; Countrywide Financial

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