Mortgage Servicing Fraud
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Nye Lavalle
Bank of America in Settlement Worth Over $8 Billion
Up to 390,000 Borrowers Covered in Deal With State Attorneys General Over Risky Loans Originated by Countrywide Financial

In a sweeping deal that could be worth more than $8.6 billion, Bank of America Corp. has agreed to settle claims brought by state attorneys general regarding certain risky loans originated by Countrywide Financial Corp.

The deal, to be announced on Monday, would cover as many as 390,000 borrowers, a Bank of America spokesman said. It would apply to borrowers who took out subprime loans with adjustable or fixed interest rates as well as those with option adjustable-rate mortgages that are serviced by Countrywide, which was acquired by Bank of America Corp. on July 1. Option adjustable-rate mortgages allow borrowers to make a minimum payment that may not even cover the interest due and can lead to a rising loan balance.

The cost of the program will be shared by Bank of America and investors who own securities composed of mortgages originated by Countrywide or by third parties who sold those loans to Countrywide. The eligible mortgages were originated prior to Dec. 31, 2007.

"With this settlement, we have the first-of-its-kind mandatory loan modification program," said Illinois Attorney General Lisa Madigan, who had filed a civil lawsuit alleging that Countrywide engaged in unfair and deceptive practices. "This program is going to help homeowners stay in their homes, which ultimately helps investors," she added. "It will shore up communities and therefore it will help with the economy."

Under the terms of the deal, Bank of America has agreed to, where possible, modify the terms of these loans where borrowers are seriously delinquent or likely to become so after their interest rate or monthly payment resets. Bank of America will first try to refinance borrowers into government-backed loans under the federal Hope for Homeowners program, which will generally require a reduction in the principal of the borrower's loan.

Another option is to reduce the borrower's interest rate to make the loan more affordable. In some cases, borrowers' interest rates may be reduced to as low as 2.5%, then rise in a stepwise fashion over time, a Bank of America spokesman said.

"We are seeking to put customers into loan modifications that are affordable and sustainable," the spokesman said. Under the program, borrowers' mortgage-related payments shouldn't exceed 34% of their monthly income. The modifications will be offered to borrowers who live in their homes and not to investors.

For borrowers with option adjustable-rate mortgages, Bank of America will reduce loan amounts so that borrowers have as much equity, if not more, than when they took out the option ARM, a Bank of America spokesman said. Bank of America will not charge borrowers for modifying the loans and will waive any prepayment penalties for those with option ARMs.

The value of the modification program is as much as $8.4 billion, according to the Bank of America spokesman. The costs of the program "have already been estimated and accounted for" by Bank of America as part of its acquisition of Countrywide, the spokesman added.

The Countrywide settlement is likely to become the largest "predatory lending" settlement in history, said California Attorney General Edmund G. Brown Jr. in a statement. The agreement would dwarf the nationwide $484 million settlement with Household Finance Corp. in 2002, he added. Countrywide has faced civil lawsuits from a number of states, including California, Florida and Illinois. Those three states played a key role in negotiating the settlement, a Bank of America spokesman said.

The Countrywide settlement "will be a good framework" for negotiations with other mortgage companies, said Florida Attorney General Bill McCollum. Mr. McCollum added that the precise details of the program are still being finalized.

In some cases, changing the terms of the loan will require the approval of investors who hold securities made up of loans that are serviced by Countrywide. Bank of America "will continue to work with investors" to get approval for the modifications, the Bank of America spokesman said. "We believe this creates a win-win for investors and for customers."

Bank of America has also set aside $150 million to provide relief for borrowers in foreclosure by, in many cases, refunding portions of closing costs and fees associated with the loan. Another $70 million has been put aside to provide financial assistance to borrowers who will lose their homes to "help them get on their feet and leave the mortgage premises in good condition," a Bank of America spokesman said. While loan modifications will be offered nationally, the additional $220 million will be made available to residents of states that ultimately sign an agreement with Bank of America.

In addition to California, Florida and Illinois, attorneys general in a number of other states, including Arizona, Connecticut, Iowa, Michigan, North Carolina, Texas and Washington, are also expected to sign the agreement, the Bank of America spokesman said.

Bank of America will begin sending offers to borrowers who qualify for a modification by Dec. 1. Bank of America won't initiate or advance foreclosure sales for borrowers who are likely to qualify for a program until a decision has been made regarding borrowers' eligibility.

Write to Ruth Simon at
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