According to the U.S. Securities and Exchange Commission (SEC) filing on Friday, major banking bellwether Bank of America Corporation BAC has agreed to settle charges for defrauding shareholders and relying on an electronic mortgage registry known as MERS by paying $335 million. Investors accused the bank of concealing its exposure to risky mortgage securities.
The settlement was disclosed in the company’s filing, according to which BofA has already reserved funds for the settlement as of Jun 30, 2015. However, the settlement awaits final documentation and the court’s approval.
The Probe
Investors led by the Pennsylvania Public School Employees' Retirement System accused BofA of misleading them towards buying the company’s stock in 2009 and 2010 including shares sold in repaying the bailout money of $45 billion. According to investors, with the fear of failing to raise more capital, the banking behemoth concealed the fact that it might have to repurchase securities worth billions of dollars backed by risky loans, which also included those from the former Countrywide Financial Corp.
Furthermore, shareholders alleged BofA of depending on Merscorp Inc's private Mortgage Electronic Registration Systems registry. Per shareholders, knowing MERS’ inadequacy in record keeping, which would pertain to problems in legally foreclosing thousands of delinquent mortgages, the bank relied upon the same.
MERS was formed in 1995 as a commercial and easy means of trading mortgage debt. Previously, mortgages were registered at the county clerks’ offices and a fee was charged against these. However, MERS replaced the system and introduced one-time online registration. MERS used to record servicing rights and ownership interests in mortgage loans on registration, enabling banks to buy and sell loans without recording transfers with counties.
Conclusion
Despite BofA claiming that majority of its legacy MBS lawsuits have been resolved, we believe that the company’s legal issues will continue to make headlines. Nevertheless, the negative impact from the same on its financials is expected to diminish. BofA currently carries a Zacks Rank #3 (Hold).
Banks across the globe have been facing increasing scrutiny for their business practices. Many of the firms have paid billions of dollars as fines and compensation to settle lawsuits and probes. Many investors have lost their hard-earned money as a result of such business malpractices. Such settlements help restore their confidence in law-enforcement agencies. Moreover, it reduces the existing litigation burden of banks.
Apart from BofA, several other major global banks continue to face legal issues for their business conduct in the past. These include JPMorgan Chase & Co. JPM, Morgan Stanley MS, Citigroup Inc. C and Wells Fargo & Company.
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