Bank of America, sued by U.S. attorneys in August over an $850 million mortgage bond, faces three additional Justice Department civil probes over mortgage-backed securities, according to two people with direct knowledge of the situation.
U.S. attorneys offices in Georgia and California are examining potential violations tied to Countrywide Financial, the subprime lender Bank of America bought in 2008, said the people, who asked not to be identified because the inquiries aren't public. U.S. attorneys in New Jersey are looking into deals involving Merrill Lynch, purchased by the firm in 2009, the people said.
If claims are brought, Bank of America would join JPMorgan Chase in facing Justice Department demands that it resolve liabilities inherited while buying weakened rivals at the government's urging during the credit crisis. JPMorgan, the biggest U.S. bank, reached a tentative $13 billion agreement last week to end civil claims over mortgage-bond sales, including those handled by Bear Stearns Cos. and Washington Mutual Inc. operations purchased in 2008.
Bank of America, led by Chief Executive Officer Brian T. Moynihan, 54, is being scrutinized for violations of the Financial Institution Reform, Recovery and Enforcement Act of 1989, or FIRREA, an outgrowth of the savings-and-loan crisis, according to the people. The Justice Department cited that statute in its August lawsuit against the firm, which is the nation's second-largest lender after JPMorgan.
The law allows the government to sue an individual or group for fraud that affects a federally insured financial institution. It carries a 10-year statute of limitations.
Bill Halldin, a spokesman for Charlotte, North Carolina-based Bank of America, declined to comment on the pending inquiries. Spokesmen for the three U.S. attorneys offices and the Justice Department declined to comment or didn't immediately respond to telephone calls and e-mails.
Bank of America was little changed at $14.53 at 9:35 a.m. in New York. The stock gained 25 percent this year through yesterday, trailing the 28 percent advance for the 24-company KBW Bank Index.
The lender wrote in an Aug. 1 regulatory filing that it's cooperating with state and federal probes into how home loans were bought, bundled and then sold to investors. While the company didn't specify the number of inquiries, it said the Justice Department had already signaled intent to file civil complaints over "one or two" jumbo prime securitizations.
Bank of America said at the time that it was speaking to regulators "to explain why the threatened civil charges are not appropriate." The Justice Department lawsuit filed days later involved a single jumbo prime deal.
The U.S. complaint accused the firm of misleading investors about the quality of loans tied to $850 million in mortgage- backed securities. While the bank had portrayed the bond as backed by prime loans vetted by its staff, most were riskier wholesale debts, meaning they were originated by outside brokers, authorities wrote. Some were "PaperSaver" loans that hadn't required proof of borrowers' income.
Buyers of the bonds were "sophisticated investors" who were capable of assessing the risks, Halldin said after the suit was filed Aug. 6.
President Obama ordered the creation of a task force last year to coordinate investigations into improper mortgage-bond underwriting by banks. As part of that effort, U.S. attorneys in California are examining potential FIRREA violations by New York-based JPMorgan that would be included in the firm's $13 billion settlement, a person with knowledge of the deal has said. Terms of the accord, described by people familiar with the talks, are still being negotiated.
The U.S. efforts are adding to more than $100 billion in legal costs already incurred by the six biggest U.S. banks since the credit crisis, a figure exceeding all of the dividends paid to shareholders in the past five years, according to data compiled by Bloomberg. JPMorgan Chief Executive Officer Jamie Dimon, 57, said in a speech last year that he did the U.S. a favor by buying Bear Stearns and that he might not go through with it again because of how much the deal ultimately cost.
"This incessant push for more cases where most thought the book had been closed creates an air of distrust for future dealings with the government," said Jacob Frenkel, a former Securities and Exchange Commission lawyer who's now a partner at Shulman Rogers Gandal Pordy & Ecker in Potomac, Maryland. "It appears to be a political response to political outrage."
JPMorgan's proposed settlement could be used as a guide for other firms to resolve probes, New York Attorney General Eric Schneiderman, the co-chairman of the task force, said at a news briefing in Manhattan.
"We are very, very hopeful that we will have a resolution with this bank that can serve as a template for resolutions with other banks," Schneiderman said.
The Justice Department's August case is U.S. v. Bank of America Corp., 13-cv-00446, U.S. District Court, Western District of North Carolina (Charlotte).