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From Securities Regulation Daily, August 6, 2013

SEC charges Bank of America with mortgage-backed securities fraud

By John M. Jascob, J.D.

The SEC has charged Bank of America and two subsidiaries with failing to disclose key risks and misrepresenting facts in an offering of residential mortgage-backed securities (RMBS). In a complaint filed with the U.S. District Court for the Western District of North Carolina, the SEC alleged that Bank of America misrepresented and omitted material facts regarding the residential mortgages backing an RMBS known as BOAMS 2008-A that was offered and sold in 2008 (SEC v. Bank of America, N.A., August 6, 2013).

“Toxic waste.” According to the SEC, Bank of America failed to tell investors that more than 70 percent of the $855 million in mortgages backing the offering were originated through the bank’s wholesale channel of unaffiliated mortgage brokers. Described at the time as "toxic waste" by Bank of America's CEO, these wholesale channel loans presented much greater risks of delinquencies, defaults, underwriting defects, and prepayment, yet Bank of America only selectively disclosed the offering's percentage of wholesale channel loans to a limited group of institutional investors, the SEC claims.

Shifting the risk of loss. “In its own words, Bank of America ‘shifted the risk’ of loss from its own books to unsuspecting investors, and then ignored its responsibility to make a full and accurate disclosure to all investors equally,” said George S. Canellos, Co-Director of the SEC’s Division of Enforcement, in a news release. Separately, the Justice Department has announced a parallel civil action against Bank of America for violations of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA).

Underwriting standards misrepresented. Although Bank of America represented that the mortgage loans backing BOAMS 2008-A were underwritten in conformity with the bank’s own guidelines, the loans were allegedly riddled with ineligible appraisals, unsupported statements of income, misrepresentations regarding owner occupancy, and evidence of mortgage fraud. Moreover, the key ratios of debt-to-income and original-combined-loan-to-value were allegedly routinely miscalculated, and then the materially inaccurate ratios were provided to the investing public. The disproportionate concentration of high-risk wholesale loans and the inclusion of a material number of loans failing to comply with the bank's internal underwriting guidelines resulted in losses of nearly $70 million, the SEC claims, with anticipated future losses of approximately $50 million.

Relief sought. As a result of the misstatements and omissions, the SEC has charged Bank of America entities with violations of Securities Act Sections 17(a)(2) and 17(a)(3). The SEC has also charged two broker-dealer subsidiaries with violations of Securities Act Section 5(b)(1) for failing to publicly file with the SEC copies of loan tapes containing information about the channel of origination for the loans underlying BOAMS 2008-A that were disclosed only to select investors. The SEC is seeking a permanent injunction against Bank of America, disgorgement of ill-gotten profits or unjust enrichment, and an order imposing civil penalties.

The case is No. 3:13-cv-447.

Attorneys: William P. Hicks for the SEC.

Companies: Bank of America, N.A.; Banc of America Mortgage Securities, Inc.; Merrill Lynch, Pierce, Fenner & Smith, Inc. F/K/A Banc of America Securities LLC

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