On Thursday, Aug. 21, Bank of America and the U.S. Department of Justice (DOJ) reached a $16.65 billion settlement. The settlement resolves federal and state claims against Bank of America and its affiliates, Countrywide Financial and Merrill Lynch, regarding their mortgage lending and securitization activities. This is the largest civil settlement ever reached between the U.S. government and a single company, and it includes $7 billion in funding for homeowner relief, community development and affordable rental housing activities that families and communities across the country will welcome.
The settlement has two parts: $9.65 billion will go toward settling legal claims with federal and state governments, and $7 billion to consumer relief. There are specific provisions around affordable rental housing and tax relief for borrowers that are of particular note.
Federal and state government: The $9.65 billion includes a $5.02 billion fine under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA). The remainder, approximately $4.6 billion, will go to settle federal claims related to Bank of America’s origination and sale of mortgages, to settle claims with the Federal Deposit Insurance Corporation (FDIC) and the Securities and Exchange Commission (SEC) and to settle claims with six states: California, Delaware, New York, Kentucky, Maryland, and Illinois.
Consumer relief: The $7 billion in consumer relief will be a mix of cash payments and credit for eligible activities. The eligible activities for homeowners in distress include first lien principal forgiveness, forgiveness of forbearance, forbearance, extinguishment of second liens and forgiveness of junior liens. Bank of America will also receive credit for low to moderate income lending that supports homeownership. Community reinvestment and neighborhood stabilization activities are eligible under the settlement and include funding for demolition/property remediation of abandoned residential properties; mortgages or REO properties that Bank of America donates to local governments or nonprofits; funding to capitalize Community Development Financial Institutions (CDFIs), land banks and community development funds; donations to Interest on Lawyers’ Trust Account (IOLTA) organizations (which provide funds to legal aid organizations); and funding to HUD approved housing counseling agencies.
Rental housing: Bank of America can receive credit, as part of its consumer relief agreement, for financing affordable rental housing. Its support must be to properties for low-income households (equivalent to Low Income Housing Tax Credit standards) and that meet additional income and unit size criteria to ensure low income families benefit from the rental housing. A possible indicator of how these requirements will play out are the specifications that are part of Citigroup’s recently announced programunder its settlement.
Borrower tax relief: Additionally, as explained in the DOJ briefing this morning, Bank of America will provide $490 million plus the $7 billion in consumer relief to support tax relief for borrowers who receive loan modifications or principal forgiveness. Bank of America will provide these funds unless Congress passes an extension of the Mortgage Debt Relief Act (something NHC and many others have repeatedly called for).
Bank of America must reach minimum credit levels in the six states that are part of the settlement so its efforts may be targeted to California, Delaware, Kentucky, New York, Maryland, and Illinois. According to the settlement statement, Bank of America has a deadline of Aug.31, 2018, to meet all of its obligations.
As with other mortgage settlements, the parties involved have not explained the particular distribution of relief amounts among federal agencies, state governments, community benefits and consumer relief. And while these financial amounts are notable because of their size, it is unclear how much of the consumer relief and community benefits will be new activity on the part of Bank of America and how much recognizes current or planned business activities. Settlement payments, excluding the $5 billion FIRREA fine, are also tax deductible for the bank. We are hopeful that more details will emerge from the settlement monitor and the parties involved.
Details aside, as Associate Attorney General Tony West stated in the DOJ briefing Thursday morning, this is one of the largest financial relief packages ever reached, and $7 billion in funding for homeowner relief, community development, and affordable rental housing activities will have significant positive impacts on communities across the country.