On Tuesday, the Securities and Exchange Commission charged Bank of America (BAC) and two subsidiaries with defrauding investors who bought residential mortgage-backed securities (RMBS) by failing to disclose key risks and misrepresenting facts about the underlying mortgages.
The SEC alleges that BofA did not tell investors that more than 70% of the mortgages backing the offering – called BOAMS 2008-A – came from the bank’s “wholesale” channel of mortgage brokers unaffiliated with Bank of America entities.
Furthermore, the SEC says, BofA knew the wholesale-channel loans – described by its then-CEO as “toxic waste” – presented greater risks of delinquencies, early defaults, underwriting defects and prepayment, yet it “only selectively disclosed the percentage of wholesale channel loans to a limited group of institutional investors,” regulators say, rather than disclose this material information to all investors or file the information publicly as required.
“In its own words, Bank of America ‘shifted the risk’ of loss from its own books to unsuspecting investors and then ignored its responsibility to make a full and accurate disclosure to all investors equally,” said George S. Canellos, co-director of the SEC’s Division of Enforcement, in a press release. “This is one in a long line of RMBS-related enforcement actions brought by the SEC to hold entities accountable for wrongdoing connected to the financial crisis.”
Also on Tuesday, the Department of Justice says it will take parallel civil action against BofA for violations of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 involving $850 million of RMBS sales in 2008, which have resulted in estimated losses of roughly $120 million.