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BofA Settles Countrywide Charges - Analyst Blog

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In one of the largest settlements by any financial institutions in the history, Bank of America Corporation ( BAC ) has agreed to pay nearly $335 million to settle civil charges against its Countrywide Financial unit. The Department of Justice (DoJ) made this announcement on Wednesday. The settlement agreement was filed with the central district court of California and still subject to court approval.

BofA had acquired Countrywide back in 2008, when the economic crisis was at its peak. The lawsuit against Countrywide states that the company had used discriminating lending practices against qualified African-American and Hispanic borrowers on home loans. Attorney General Eric Holder affirmed that these minority borrowers, who qualified for traditional mortgage rates, were pushed into subprime loans with higher interest rates.

After reviewing nearly 2.5 million loans, including loan terms and creditworthiness of the borrowers, the DoJ revealed that Countrywide has overcharged (higher fees and interest rates) about 200,000 minority borrowers in 41 states and the District of Columbia compared with white borrowers with similar credit profile. Additionally, Countrywide also tricked more than 10,000 creditworthy minorities into more expensive subprime loans. Majority of these victims were not even aware of this partiality and the trap they were falling into.

The settlement amount paid by BofA would be distributed between aggrieved borrowers. In addition, those who were wrongly steered into subprime loans will get a higher compensation. However, there will be no relief for those borrowers who paid higher interest rates.

The settlement deal with BofA came nearly 5 years after the DoJ had received a referral from the Federal Reserve that described about Countrywide's involvement in discrimination against minorities. Under the federal civil rights, Fair Housing laws and Equal Credit Opportunity Acts, a lending practice is illegal if it has an unequal impact on minority borrowers.

The DoJ's civil rights division, created in 2010, mainly focuses on banks and financial institutions that are suspected to be discriminating against a minority borrower. At present, the department is pursuing nearly 20 lawsuits with charges related to discriminatory practices against minorities who are buying homes.

BofA's settlement agreement dwarfs American International Group Inc. 's ( AIG ) deal, which was reached in 2010 when AIG agreed to pay $6.1 million for similar charges. This is also the largest settlement for BofA involving Countrywide. In May 2011, the company agreed to pay $20 million over allegations that argued Countrywide's illegal foreclosure on members of the U.S. military without court orders. Similarly in June 2010, the Federal Trade Commission reached a settlement with Countrywide for $108 million over accusations that it overcharged homeowners for loan servicing fees.

With this settlement deal, it would be wrong to say that legal woes for BofA have ended. The company is still facing numerous litigations and this is likely to have a material impact on the company's financial stability.

Currently, BofA retains a Zacks #3 Rank, which translates into a short-term 'Hold' rating. Also, considering the fundamentals, we are maintaining a long-term "Neutral" recommendation on the stock.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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