In what would be the biggest civil penalty for a bank linked with the 2008 financial crisis, Bank of America (BAC) is nearing a roughly $17 billion federal settlement for failing to adequately disclose the risks behind its mortgage securities.
The U.S. Department of Justice and Bank of America have reached a tentative verbal agreement over the pact, CBS News has learned. The sides are still trying to hammer out exact terms, and the final settlement amount could change. Among the details still being worked out are the specific legal charges the bank would plead to and how much money will be earmarked to assist homeowners hurt by its conduct, according to a person familiar with the negotiations.
According to Bloomberg News, the proposed settlement calls for Bank of America to pay about $9 billion in cash, with the balance coming in the form of mortgage relief for homeowners. A final settlement could come as early as next week.
A spokesman for Bank of America did not immediately respond to a request for comment.
Most of the proposed penalties against Bank of America stem from its acquisitions of lender Countrywide Financial and investment bank Merrill Lynch during the height of the housing crash. Bank of America officials have argued that it shouldn't be held accountable for the loans and mortgage-backed securities the two firms' issued in the years leading up to the crash. The company has also suggested that the government pressured it into buying Countrywide, once the nation's biggest subprime lender, to help stabilize the banking system.
Attorney General Eric Holder and other Justice officials rejected those arguments. With Bank of America and the government still remaining far apart on the size of a prospective settlement, Holder on July 30 warned Bank of America CEO Brian Moynihan that the agency would sue the bank the next day unless it agreed to significantly raise its settlement offer.
Bank of America faced mounting pressure to settle the government's charges after U.S. District Judge Jed Rakoff last week ordered the company to pay $1.3 billion because of bad loans it made to Fannie Mae and Freddie Mac. That legal setback underscored the bank's stiff challenge into continuing to fight the Justice Department's claims.
According to Bloomberg News, roughly 75 percent of the $965 billion in mortgage-backed securities that Bank of America issued between 2004 and 2008 came from Countrywide. About $245 billion in these securities have become delinquent or defaulted.
The proposed fine and related remuneration would amount to the largest ever financial penalty for a U.S. company, topping the $13 billion and $7 billion JPMorgan Chase (JPM) and Citibank's (C) agreed to pay, respectively, earlier this year to settle similar federal claims of mortgage misconduct.
With other Wall Street firms having mostly resolved federal allegations of dodgy mortgage practices, a move by Bank of America to settle with the government would bring one of the most controversial chapters in U.S. banking history largely to a close.
"In the short-term, this gives the banks and government a chance to clear the books," said Cornell Law School professor Robert Hockett. "Past wrongs have been dealt with, and this government has a chance to say we did something about it."
Bank of America shares were flat Thursday. The bank recently boosted its dividend for the first time in seven years.
The penalties "while not negligible are not exactly devastating," Hockett said.
Critics of Wall Street have complained that the government's mortgage settlements with Wall Street fail to hold bank executives accountable for their actions, which had devastating consequences for the economy.
-- With reporting by Paula Reid