Trusts Say BofA Plays a Mortgage Shell Game

LOS ANGELES (CN) - A trustee for 42 homeowner trusts accuses Bank of America of "playing a shell game" to avoid liability for Countrywide Financial's part in the housing meltdown. The trustee claims that after Bank of America acquired Countrywide Financial Corp. in early 2008 it set up a "byzantine corporate structure" in a continuing attempt to avoid state and federal regulators.

Bank of America and its subsidiaries were among the defendants in the 17 lawsuits that Fannie Mae and Freddie Mac filed on Friday, seeking billions of dollars in damages for mortgage-backed securities whose values plummeted during the financial meltdown that began in late 2007.

Owner Management Service LLC dba Trust Holding Co. sued Bank of America and Recontrust Co. in Superior Court. Reconstruct Co. acts as trustee under deeds of trust secured by the trusts' homes.

The trustee says Bank of America bought Countrywide Financial after the poster child for the mortgage crisis "experienced extreme financial deterioration" arising from its "fraudulent mortgage lending" and "mortgage servicing abuses."

Owner Management Service is trustee for the 42 individual trusts, each of which is a titled owner of homes in Los Angeles County. Bank of America's subsidiary, BAC Home Loans Servicing, financed the loans for each of the homes.

The trustee says it was damaged by BAC Home Loans Servicing's "mortgage servicing abuses." BAC was known as Countrywide Home Loans Servicing LP until it changed its name in 2009.

The trustee says that since the buyout, Bank of America have engaged in "a complex series of transactions involving moving Countrywide Financial Corp. and the subsidiaries of Countrywide Financial Corp., as well as the assets of such corporations, to and fro within the Bank of America Corp. group of companies in an attempt to evade federal and state regulatory action with respect to mortgage servicing abuses occurring at Countrywide Home Loans Servicing LP and successor entities."

In July 2008, the trustee says, Bank of America's subsidiary NB Holding Corp. completed the acquisition of Countrywide Home Servicing LP so that Countrywide Home would be a "non-banking" indirect subsidiary of Bank of America and therefore "evade regulatory oversight of mortgage servicing activities by the United States Office of the Comptroller of the Currency (the OCC)."

"Bank of America Corp. executives and counsel also believed that such structure would allow Bank of America Corp. to evade regulatory licensing and oversight of its unlawful and fraudulent mortgage servicing activities by state regulatory authorities because Countrywide Home Loans Servicing LP, although not a subsidiary of Bank of America NA, would still be related to Bank of America NA, and therefore could claim a preemption from state regulation and licensing," the complaint states.

Bank of America principals then stripped Countrywide Financial Corp. and Countywide Home Loans of all their assets "to further defraud claimants and potential claimants against Countywide entities," the complaint states.

"In November, 2008, Countrywide Home Loans Inc. transferred all of its assets to Bank of America Corp., which thereafter transferred such assets to Bank of America NA and formed a unit of Bank of America NA called 'Countrywide Home Loans.' Countrywide Home Loans, a division of Bank of America NA thereafter conducted the business previously conducted by Countrywide Home Loans Inc.," the trustee says.

It says that in 2009 Bank of America shed the 'Countrywide' brand name, knowing that "in the minds of consumers and regulators" it was associated with Countywide Financial Corp.'s fraud.

Countrywide Home Loans Servicing LP then became BAC Home Loans Servicing LP, while Countrywide Home Loans was changed to Bank of America Home Loans.

In June 2010, the Federal Trade Commission barred BAC Home Loans and Countrywide Home Loans from certain practices, including "making false or unsubstantiated representations about loan accounts," the trustee says.

"Then, in April, 2011, Bank of America Corp. fully realized that its shell game to evade regulatory oversight was not working when Bank of America NA was hit with a Consent Order from the OCC relating to the mortgage servicing activities of the non-bank entity BAC Home Loans Servicing LP. That Consent Order did not differentiate between Bank of America NA and BAC Home Loans Servicing LP and found that Bank of America NA serviced 13,500,000 residential mortgage loans," the complaint states.

With new financial regulations on the horizon in the form of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and tougher regulations on mortgage servicers from the Consumer Financial Protection Bureau, Bank of America merged BAC Home Loans Servicing LP into Bank of America NA, the trustee says.

"No sooner had Bank of America Corp. moved its mortgage servicing activities to the new shell, than it figured out that it still would be stuck with the large costs of complying with the already existing OCC Consent Order, which had ordered that the unlawful and fraudulent mortgage servicing activities be corrected going forward and that with respect to past unlawful activities such judicial and non-judicial foreclosures be reversed where possible and that those injured be compensated," the complaint states.

To try to duck potential liability, the trustee says, Bank of America sold servicing rights to 400,000 loans for $500 billion. According to the complaint, the unpaid principal on those loans is $73 billion.

"Surprisingly (or maybe not given the equally spotted history of the United States government sponsored enterprises ['GSE's.'] in the mortgage loan meltdown), Fannie Mae is the purported purchaser or financier for the purchase of the mortgage servicing rights. It is expected that, unless stopped, Bank of America Corp. will continue to sell all of its mortgage servicing portfolio in the coming year in order to evade its legal responsibilities under the OCC Consent Order and under applicable law to correct and rectify the mortgage servicing abuses and unlawful activities that have occurred," the complaint states. (Parentheses and brackets in complaint.)

Owner Management Service wants Bank of America ordered to comply with the consent order and to stop selling its mortgage servicing rights. And it seeks damages for unfair business practices, breach of contract and promissory estoppel.

The trustee is represented by Ronald Tym of Chatsworth.

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