SEC Accuses Bank of America of $855M Fraud

     CHARLOTTE, N.C. (CN) – Bank of America fraudulently sold $855 million of residential mortgage-backed securities which its own CEO described as “toxic waste,” the SEC claims in Federal Court.
     But Bank of America did disclose the “toxic waste” to “select investors,” the SEC says in its lawsuit.
     Bank of America’s fraud cost investors $70 million, and another $50 million in losses are expected, the SEC said in a statement.
     Bank of America claims the losses stemmed from the collapsing real estate market and said it will fight the charges.
     The SEC sued Bank of America, Banc of America Mortgage Securities, and Merrill Lynch, Pierce, Fenner & Smith fka Banc of America Securities LLC, on two counts: securities fraud, and failure to file a prospectus.
     The SEC says the fraud occurred in the bank’s sale of $855 million in Banc of America Mortgage Securities (BOAMS) securities in 2008. “BOAMS 2008-A was offered and sold as a ‘prime’ securitization appropriate for the most conservative RMBS investors,” the SEC said in its statement.
     The statement continued: “These mortgage loans, however, were riddled with ineligible appraisals, unsupported statements of income, misrepresentations regarding owner occupancy, and evidence of mortgage fraud. The key ratios of debt-to-income and original-combined-loan-to-value were routinely miscalculated, and then the materially inaccurate ratios were provided to the investing public.”
     The Department of Justice on Tuesday filed a parallel civil complaint against Bank of America under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989.
     The SEC says in its 62-page complaint: “Specifically, in filings with the Commission, the Bank of America Entities portrayed BOAMS 2008-A as backed by ‘prime’ mortgage loans, meaning that those loans had a higher credit quality than other types of mortgage loans, such as ‘subprime’ or ‘Alt-A.’ Because BOAMS 2008-A was portrayed as being backed by prime mortgages, it attracted investors looking for safe, conservative investments.
     “In fact, an unprecedented portion of the mortgage loans backing the security had been originated through mortgage brokers unaffiliated with the Bank of America Entities (referred to as the ‘wholesale channel’ or ‘wholesale loans’).
     “By the time BOAMS 2008-A was being offered and sold to investors, the Bank of America Entities knew that wholesale channel loans were significantly more likely than loans originated by BANA employees to be subject to material underwriting errors, become severely delinquent, fail early in the life of the loan, or prepay – all of which negatively impact investors in RMBS.
     “By the time the BOAMS 2008-A was being offered and sold, the then CEO of BAC [Bank of America Corp.] had referred to wholesale loans as ‘toxic waste’ and BANA [Bank of America, N.A.] had closed its wholesale channel.
     “Although required to disclose this information under Regulation S-K and subpart Regulation AB of the Securities Act of 1933 (‘Securities Act’), the Bank of America Entities failed to disclose the large concentration of wholesale loans as well as the substantial risk the concentration presented to investors.
     “In addition, the filings with the Commission and the loan tapes provided to investors and rating agencies misrepresented that the mortgage loans backing BOAMS 2008-A were underwritten in accordance with BANA’s guidelines. In fact, the Bank of America Entities knew or should have known that a large percentage of the mortgage loans had significant deviations from BANA’s guidelines, such as ineligible appraisals or falsified borrower income, and that they were not eligible for inclusion in BOAMS 2008-A.
     “BAS also provided investors and the various rating agencies that rated RMBS with documents, known as loan tapes, that provided the key characteristics of the underlying mortgages. The loan tapes provided for BOAMS 2008-A misrepresented material facts about the underlying mortgages. For example, the loan tapes misrepresented debt-to-income (‘DTI’) and original combined loan-to-value (‘OCLTV’) ratios of the mortgages backing BOAMS 2008-A. These misstated ratios within the loan tapes falsely portrayed the mortgage loans, and thus BOAMS 2008-A, as less risky. BOAMS publicly filed with the Commission certain of these loan tapes containing material misrepresentations.
     “As a result of the misstatements and omissions, the Bank of America Entities violated Sections 17(a)(2) and 17(a)(3) of the Securities Act [15 U.S.C. §§ 77q(a)(2) & 77q(a)(3)].
     “BAS and BOAMS also violated Section 5(b)(1) of the Securities Act [15 U.S.C. § 77e(b)(1)] by failing to publicly file with the Commission – and thereby make accessible to all investors – 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 seeks disgorgement with interest, civil penalties and an injunction.

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