By Devlin Barrett, Dan Fitzpatrick and Christina Rexrode
Bank of America Corp. is in talks to pay at least $12 billion to
settle civil probes by the Justice Department and a number of
states into the bank's alleged handling of shoddy mortgages,
according to people familiar with the negotiations.
At least $5 billion of that amount is expected to go toward
consumer relief--consisting of help for homeowners in reducing
principal amounts, reducing monthly payments and paying for blight
removal in struggling neighborhoods, these people said.
The North Carolina bank's total tab to end government probes and
lawsuits related to its precrisis conduct is increasingly likely to
surpass the record $13 billion that J.P. Morgan Chase & Co.
paid last year to settle similar allegations, these people said.
Bank of America has already struck a $6 billion settlement, by the
Justice Department's measure, with the Federal Housing Finance
Agency.
If finalized, a settlement on that scale would mark another
major penalty for a large financial institution, as the Justice
Department presses a number of cases against global banks.
Paying $5 billion to help homeowners is part of a broader
scenario Bank of America has floated, in which it would pay $12
billion in addition to the previous $6 billion FHFA settlement,
these people said.
Government negotiators, however, are pushing the bank to pay
billions more and put up more cash as part of the deal. Under the
terms of a recent proposal made by the bank, at least half of the
settlement would be in the form of help for homeowners, but that
can be done in ways that make the actual cost to the bank
significantly less than a direct cash payment to agencies.
Talks between the two sides have heated up in recent days, with
meetings taking place at the Justice Department on Monday and the
week before, these people said. Still it is unclear when they might
reach a tentative settlement given that they still remain far apart
on the size of any penalty to be levied by the Justice
Department.
Bank of America's legal charges have been a bane to its
earnings, with the bank paying about $60 billion since the
financial crisis to settle lawsuits and buy back mortgage
securities. At an investor conference last week, Chief Executive
Brian Moynihan noted that the impending Justice Department
settlement is a remaining wild card. "Of the big stuff," he said,
"that's really the one that's left out there."
The consumer-relief portion of a settlement would likely include
measures similar to those used in the J.P. Morgan deal-- reductions
of mortgage principal for some customers, reductions of monthly
payments for others and money spent on blight removal in parts of
the country where the housing downturn left abandoned eyesores,
these people said.
Under the terms being discussed, Bank of America would pay at
least $1 billion more in consumer relief than the $4 billion J.P.
Morgan agreed to spend on those efforts in November as part of its
settlement of a government civil probe into how it packaged shoddy
mortgages into securities.
Those residential mortgage-backed securities were a major
ingredient leading to the housing and financial crisis in 2008.
Bank of America's also agreed to pay $6 billion to FHFA, while J.P.
Morgan settled for $4 billion.
The two sides haven't come to terms yet on Bank of America's
total settlement figure. A perfect comparison between the Bank of
America talks and the $13 billion deal struck with J.P. Morgan is
difficult, because Bank of America has settled with some government
agencies that were part of the J.P. Morgan deal, and there are
other states involved in the Bank of America talks that weren't a
part of the J.P. Morgan discussions.
If the two sides cannot reach a deal, the Justice Department
would have to decide whether to file a civil lawsuit against the
bank.
Attorney General Eric Holder has said that before he leaves his
job, he wants to resolve a number of high-profile probes of
financial firms' conduct leading up to the economic collapse. He
has also said that he views the structure of the J.P. Morgan deal
as a template for deals with other banks, and that the consumer
relief issue was an important component to reaching a settlement.
Some of the consumer relief measures are novel, such as blight
removal, and dollars spent by the bank on certain areas are worth
more to them than dollars spent elsewhere.
The sometimes creative terms of consumer relief means the bank
could find ways to lessen the actual cost of a settlement.
For instance, in the J.P. Morgan settlement, the bank agreed to
provide at least $1.2 billion in mortgage principal reduction to
customers - but for every dollar of principal reduction granted by
the bank in the hardest-hit parts of the country, it will get $1.25
worth of credit toward the settlement. Depending on the details of
which mortgages they target for principle reduction, the bank could
boost that to as much as $1.43 toward the settlement cost. Another
condition of the J.P. Morgan deal was that an outside monitor,
approved by both sides, would oversee the bank's spending on
consumer relief.
Write to Devlin Barrett at devlin.barrett@wsj.com, Dan
Fitzpatrick at dan.fitzpatrick@wsj.com and Christina Rexrode at
christina.rexrode@wsj.com
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