Bank of America’s troubles with residential mortgage-backed securities are not over yet. According to the bank’s quarterly filing with the Securities and Exchange Commission, the bank has agreed to pay $335 million to settle a federal lawsuit that claims the bank misled shareholders as to the quality of certain mortgage-backed securities sold to investors immediately following the crisis.
Shareholders of the Pennsylvania Public School Employees’ Retirement System (PSERS) claimed in the suit that Bank of America misled them into buying stock in 2009 and 2010, some of which the bank sold to repay a $45 billion bailout. The plaintiffs also claimed that the bank knew it could not raise enough capital to buy back billions of dollars worth of securities backed by risky residential mortgage loans. Many of the risky loans were issued by Countrywide, one of the nation’s largest subprime lenders which Bank of America acquired in 2008.
The plaintiffs also claimed that Bank of America knew that recordkeeping in MERSCORP’s private Mortgage Electronic Registration System (MERS), which is a national electronic database that tracks changes in mortgage servicing and beneficial ownership interests in residential mortgage loans on behalf of its members, prevented the bank from legally foreclosing on thousands of mortgages that were delinquent.
The complaint alleges that MERS, which was created in 1995, operated seamlessly until 2008, when the housing crisis began and the country saw a major increase in mortgage defaults. The complaint states that “a number of courts made clear that it would be nearly impossible for mortgage holders or servicers to foreclose on loans processed or transferred via MERS. To foreclose on a mortgage, a party must have title to it. Courts reasoned that because MERS listed itself as the mortgagee, mortgage holders and servicers did not have standing to foreclose. Some of these suits involved BoA and Countrywide in their capacities as a mortgage holder or servicer.”
A spokesperson for the PSERS confirmed to DS News via email that a proposed settlement has been reached with Bank of America in a class action pending in the U.S. District Court for the Southern District of New York, saying "We are pleased to have served as lead plaintiff for this case and to have achieved this proposed settlement on behalf of PSERS’ members and fellow class members. The proposed settlement is pending approval by Honorable William H. Pauley, III."
When contacted for comment, a Bank of America spokesman directed DS News to the bank’s SEC filing, which can be accessed by clicking here. In the filing, the bank stated that “[t]he parties in Pennsylvania Public School Employees' Retirement System v. Bank of America, et al. agreed to settle the claims for $335 million, an amount that was fully accrued as of June 30, 2015. The agreement is subject to final documentation and court approval.”
MERSCORP issued the following statement regarding the Pennsylvania Public School Employees' Retirement System v. Bank of America case: “Neither MERSCORP Holdings, Inc. nor its subsidiary, Mortgage Electronic Registration Systems, Inc. (MERS) was a party to the lawsuit or the settlement. The courts have consistently found MERS’ role to be valid and we continue to operate in all 50 states. Today, MERS is named as mortgagee on more than two-thirds of new mortgage originations. In the 2012 order denying Bank of America’s motion to dismiss, the judge stated ‘Indeed, the plaintiff’s counsel conceded at oral argument that there is ‘nothing wrong’ with MERS if it is used correctly.’”
Bank of America has spent more than $70 billion on legal settlements and regulatory claims since the financial crisis, a large portion of which has stemmed from its July 2008 acquisition of Countrywide and the subsequent acquisition of Merrill Lynch six months later. This amount includes a then-record $16.65 billion settlement with the government in August 2014 over the misrepresentation of the quality of mortgage-backed securities sold to investors.
To view the Pennsylvania Public School Employees’ Retirement System’s complaint, click here.