BofA reaches major settlement with MBIA, but faces new legal challenge

adunn@charlotteobserver.comMay 6, 2013 

Bank of America put another major dispute over soured mortgage bonds behind it Monday. But now it faces a new legal challenge that threatens to wrap the Charlotte bank and Wells Fargo in another round of mortgage servicing litigation.

After nearly five years of legal wrangling, Bank of America will pay about $1.7 billion to bond insurer MBIA to settle a dispute over who should absorb the losses on mortgage-backed securities that went bust during the financial crisis, the bank announced Monday.

The deal is the latest in the bank’s streak of putting large-scale litigation behind it. Over the past eight months, Bank of America has put to rest disputes with shareholders over its acquisition of Merrill Lynch, with Fannie Mae over loans sold to the government-sponsored mortgage giant, and two class action lawsuits over mortgage-backed securities – a total of about $13 billion.

But Bank of America now faces new litigation on a topic it thought it had already largely settled: mortgage servicing.

At a news conference from his lower office, New York Attorney General Eric Schneiderman said his office planned to sue Bank of America and Wells Fargo over violations of the blockbuster mortgage servicing settlement the banks entered into last year.

The $25 billion settlement with state attorneys general and federal agencies resolved a series of investigations into shoddy servicing practices like “robosigning,” or having bank employees approve paperwork without reading the documents.

The agreement included more than 300 new rules the banks were to follow. Schneiderman’s complaint focuses on four rules that govern how quickly banks must respond to homeowners seeking a loan modification.

Schneiderman said he had documented 339 violations of that type between Wells Fargo and Bank of America since October, when the servicing standards went fully into effect. Of that total, 210 involved Wells and 129 focused on Bank of America.

“Wells Fargo and Bank of America have flagrantly violated those obligations, putting hundreds of homeowners across New York at greater risk of foreclosure,” he said in a statement. “I intend to use every tool available to my office to hold these companies accountable.”

Schneiderman previewed the announcement in a letter last week to the settlement’s monitoring committee, which includes North Carolina Attorney General Roy Cooper. A spokeswoman said Cooper’s office is now reviewing the letter and conferring with other committee members.

The attorneys general on the monitoring committee can decide to join New York in seeking enforcement. They could also launch their own investigations into potential violations of the new servicing rules in their own states.

According to mortgage settlement monitor Joseph Smith’s latest report, homeowners and advocates had lodged more than 6,300 complaints by the end of 2012 over perceived violations of all types.

The Observer found earlier this year that banks have continued some practices the settlement was intended to eliminate, like “dual tracking” homeowners through loan modifications and foreclosure processes at the same time.

In many cases, the practice is still allowed under the settlement’s rules.

The “single point of contact” system each bank has been required to set up for troubled homeowners has also drawn numerous complaints from borrowers who say it isn’t working in practice.

Bank of America said it takes the issues Schneiderman pointed out “seriously,” and said the bank would “work quickly to address” them.

The bank pointed out that the 139 errors cited by the attorney general are among more than 10,000 cases in which New Yorkers received some sort of relief through the settlement.

“This agreement has been good for New York, and we continue using these beneficial programs to assist troubled homeowners in New York and nationally,” a statement from spokesman Rick Simon said.

Wells Fargo, too, stressed the number of people it has helped.

“Wells Fargo is committed to full compliance with the National Mortgage Settlement and its associated standards,” the bank said in a statement from spokeswoman Vickee Adams. “It is unfortunate that the New York Attorney General has chosen this route rather than engage in a constructive dialogue through the established dispute resolution process.”

Smith, a former N.C. banking commissioner, is due to release a report on the banks’ compliance under the settlement in June.

“Like (Attorney) General Schneiderman, I continue to believe there are areas in which the banks must improve their treatment of their customers. I appreciate his interest in this important issue,” Smith said in a statement.

“I intend to use the full breadth of my power under the settlement to hold the banks accountable.”

Long-running dispute

Bank of America’s settlement with MBIA came after more than a year of negotiations.

The bond insurer originally sued Countrywide Financial Corp in 2008, the same year it was acquired by Bank of America. MBIA claimed that Countrywide misrepresented the quality of the loans it packaged and sold to investors.

MBIA insures the investors against losses, and was forced to pay out billions when the bonds ultimately defaulted.

Last month, analysts with Fitch Ratings cited the MBIA suit as one of a few large outstanding litigation issues faced by Bank of America.

Bank of America’s stock led the Dow Jones Industrial Average on news of the settlement Monday. Shares closed up more than 5 percent, at $12.88.

Dunn: 704-358-5235;Twitter: @andrew_dunn

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