Remarks as Prepared for Delivery
Thank you, Mr. Attorney General, and thank you all for being here this morning.
This morning we demonstrate once again that no institution is either too big or too powerful to escape appropriate enforcement action by the Department of Justice. At nearly $17 billion, this resolution with Bank of America is the largest the Department has ever reached with a single entity in American history.
But the significance of this settlement lies not just in its size; this agreement is notable because it achieves real accountability for the American people.
In addition to the billions of dollars the bank will pay, Bank of America has agreed to sign a statement of facts, in which it admits publicly its repeated failure, and the repeated failures of its affiliates Merrill Lynch and Countrywide, to disclose to investors key facts about the actual quality of the loans they packaged up into residential mortgage backed investment securities, or RMBS.
The statement of facts details evidence we uncovered in three separate investigations conducted by U.S. Attorney Anne Tompkins of the Western District of North Carolina; the Central District of California, represented by Acting U.S. Attorney Stephanie Yonekura; and the District of New Jersey, led by U.S. Attorney Paul Fishman, whose case largely drove the discussions that led to the resolution we announce today. His investigation found that Merrill Lynch knew, based on its own due diligence, that substantial numbers of the loans it was packaging into RMBS and selling to investors failed to meet underwriting guidelines, did not comply with the applicable law, or were inadequately collateralized -- all contrary to representations Merrill was making to investors.
The cases in California and North Carolina, involving Countrywide and Bank of America, respectively, also involved similar conduct with varying degrees of egregiousness. All, however, involved Bank of America or its affiliates saying one thing to investors about the quality of the loans they packaged into RMBS yet in reality knowing the facts indicated something quite different.
It's kind of like going to your neighborhood grocery store to buy milk advertised as fresh, only to discover that store employees knew the milk you were buying had been left out on the loading dock, unrefrigerated, the entire day before, yet they never told you.
And just like you might be in for an unpleasant surprise when you got home and poured yourself that glass of milk, investors -- such as public pension funds and federally-insured financial institutions -- were unpleasantly met with billions of dollars in losses when those securities investments soured.
Now, importantly, the statement of facts doesn't end with the Bank's admissions about its securitization of risky mortgage loans. The statement also achieves accountability by requiring Bank of America to accept responsibility for faulty loan origination practices that, in many cases, resulted in misrepresentations about the quality of those loans to Fannie Mae, Freddie Mac and the Federal Housing Administration, and contributed to the loss of hundreds of millions of dollars in taxpayer funds, as uncovered in investigations conducted by U.S. Attorney Loretta Lynch and her office in the Eastern District of New York, as well as U.S. Attorney Preet Bharara and his office in the Southern District of New York.
Taken together, these RMBS and loan origination cases have contributed to a civil penalty of $5 billion, as reflected in this settlement -- the largest civil penalty in history.
Yet in addition to accountability, this historic resolution is also significant for what it achieves in terms of restoration: it requires those we are holding accountable to shoulder some of the responsibility for repairing the damage caused by their conduct.
In this case, that's achieved by the $7 billion in consumer relief the Attorney General mentioned just a moment ago. This is one of largest consumer relief packages we have ever assembled with a single financial institution, and its impact could benefit hundreds of thousands of Americans still struggling to pull themselves out from under the weight of the financial crisis.
Some of the key consumer relief measures include:
· Affordable rental housing, where Bank of America will provide millions in financing for affordable rental housing, with a focus on family housing in opportunity areas -- one of the most critical needs in housing today.
· Community reinvestment and neighborhood stabilization, where the Bank will invest at least $100 million in community development funds, legal aid organizations, and housing counseling agencies. In some areas, Bank of America will donate vacant properties to non-profits, along with cash that will enable those non-profits to make productive use of those properties -- something that can help bring vibrancy back to dormant neighborhoods challenged by abandoned buildings.
· And perhaps most important, there will be significant loan modification, where the Bank will provide certain homeowners with mortgage principal reductions that will bring their loan-to-value ratios down to 75 percent, along with a permanent interest rate of 2 percent.
Let me give you a quick example of what that looks like. Imagine a distressed homeowner who owes $250,000 on her mortgage, but she's underwater because her house is only worth $150,000. Under this consumer relief plan, her mortgage principal would be reduced to just over $112,000 -- over $137,000 worth of mortgage debt would be forgiven, her monthly mortgage payments would be cut dramatically, and her house would be transformed from a liability into an asset with equity.
One other form of relief the Attorney General mentioned merits emphasis. Before Congress allowed the Mortgage Forgiveness Debt Relief Act to lapse at the end of last year, consumers who received the type of relief I just described weren't liable for any federal taxes they might owe on the consumer relief they received. But now, the Act is no longer in effect, and until it's extended, consumers will be responsible for paying the taxes on any consumer relief they receive.
So to help consumers defray that federal tax liability, we negotiated as part of this settlement a 25/25 Tax Relief Fund. Here's how it works: once a consumer receives relief, such as a principal write-down or mortgage forgiveness, 25% of the value of that relief will be made available to help offset any tax liability that may be incurred by the consumer, up to $25,000.
Now, this will help tens of thousands of consumers to offset, at least in part, any taxes that result from consumer relief they receive as a result of this settlement. But it's only a temporary fix; the fund isn't large enough to cover every potentially affected consumer, which is why the best solution to this problem is for Congress to heed the Attorney General’s call to extend the tax relief coverage of the Mortgage Forgiveness Debt Relief Act.
Now, as I've said before, the consumer relief that's offered as a result of this settlement won't solve every problem or cure every ill created by the financial crisis. But it will offer hope to hundreds of thousands of Americans who are still laboring under upside-down mortgages, or struggling in neighborhoods defined by boarded-up buildings, or fighting to avoid foreclosure for themselves and their families.
And that alone makes these efforts worth trying. Which is why we're not letting up and we're not going away and why we'll continue to pursue these cases either to litigation in the courts or to a significant resolution -- whichever is in the best interests of the American people.
Today's resolution would not be possible were it not for the extraordinary partnership that defines the collaboration with and among this Justice Department, our sister federal agencies and the community of state Attorneys General. So my thanks to the FDIC; the Department of Housing and Urban Development; the FHFA-OIG; the SEC; and state Attorneys General Beau Biden of Delaware; Jack Conway of Kentucky; Doug Gansler of Maryland; Kamala Harris of California; Lisa Madigan of Illinois; and Eric Schneiderman of New York, who also co-chairs the RMBS Working Group and has been an active part of this work from the beginning.
One final note. There are many who deserve recognition for the hard work they did to make today's announcement a reality, but allow me just name a special few: Assistant U.S. Attorney Leticia Vandehaar, who was the driving force behind the Merrill investigation; the Director of the RMBS Working Group, Geoff Graber; Principal Deputy Associate Attorney General, Maame Ewusi-Mensah Frimpong; Counsel to the Associate Attorney General, Stacey Grigsby; and my Deputy Chief of Staff, Cindy Chang -- thanks to all of them for their dedication and repeated all-nighters these last few weeks.
With that we welcome your questions.