Case Study: Bank of America Settles Mortgage Fraud Case for $16.65 Billion

IRAC Brief Week 6
Tyiesha Austin
Sabrina Earley
Nietheia King
Marino McKinney
Dorcas Rodriguez
Solomon Weaver
LAW/531
September 7, 2014
Aaron Gershonowitz

University of Phoenix

Case Study: Bank of America settles mortgage fraud case for $16.65 billion

Running a business in today’s economic environment can be challenging.  As a manager or Corporate Officer, there are a number of regulations that must be followed.  It is important to ensure the company is in compliance with laws and regulations that pertain to the nature of the business.  Creating a positive and trustworthy reputation in the marketplace is important to clients, consumers, investors and shareholders.  In this case, we will review the consequences of failing to comply with regulations and the resulting penalties.

Issue

 The issue in this case is whether or not the Bank of America sold billions of funds from the alleged private housing mortgage –backed securities short of disclosing important details to stakeholders (arcmax.com, 2014).  These (MBS), mortgage-backed securities, are commonly on residential property.  They are debt obligations that symbolize entitlements to the cash flows from pools of mortgage loans (US Secretaries and Exchange Commission, 2014).  Mortgage advances are acquired from lending companies, banks, and mortgage companies.  Then they are put into groups by private entity, or quasi-governmental.  Another matter also remains in question, did Bank of America turn a profit by deceiving stakeholders concerning the precarious nature of the mortgage-backed securities it marketed.

Rule

In this case the applicable rule of law would be the Securities Exchange Act of 1934. Security is defined as “(1) an interest or instrument that is common stock, preferred stock, a bond, a debenture or a warrant, (2) an interest or instrument that is expressly brought up in the securities acts, or (3) an investment contract” (Cheeseman, 691).    "Issuance of securities by corporations, limited partnerships, other businesses, and individuals” was a regulation of The Securities Act of 1933 (Cheeseman, 697).  Certain securities are exempt.  The act states that an issuer of exempt transactions "must provide investors with adequate information-including annual reports, quarterly reports, financial statements, and so on" (Cheeseman, 697).  Regarding this case, Attorney General Eric Holder pointed out that “when confronted with concerns about their reckless practices, bankers at these institutions continued to mislead investors” and approve “loans with fundamental credit, compliance and legal defects.”(9/7/14)

Analysis

The US Justice Department sued Bank of America for methodically eliminating every single check in support of the company’s balance; they removed quality control, got rid of underwriters, gave incentives to undeserving personnel to cut corners and hid the follow-on defects (Businessline, 2012).  In other words, Bank of America packaged and sold defective residential mortgage loans in order to grow their profits while harming consumers and the government mortgage agencies.  In August 2014, Bank of America reached an arrangement with US federal and state regulators to pay nearly $17 billion to settle lawsuits related to poor home loans and mortgage-backed securities relevant to the government’s lawsuit.  Bank of America admitted it deceived investors and distorted the security of loans it sold (Lawler, 2014).  The settlements payments included “$1 billion to be paid to the Federal Deposit Insurance Corporation, and $135.8 million to the Securities and Exchange Commission.”(vnew.com).  In addition, there are still open criminal charges against the Bank of America in the benefit of proprietors living in regions that were hit the hardest, according to the Department of Housing and Urban Development.