The Justice Department alleges in its lawsuit that Bank of America misled investors about the risks associated with mortgage loans that backed residential mortgage-backed securities (RMBS), and further made false statements about those loans, failed to properly perform due diligence and “filled the securitization with a disproportionate amount of risky mortgages originated through third party mortgage brokers,” a news release from the Justice Department stated (8/6/13).
Among those allegedly defrauded by Bank of America were federally insured financial institutions. Five investors reportedly bought more than $850 million in the residential mortgage-backed securities from Bank of America, with at least $100 million in losses. Those investors were not told the mortgages that originated through third-party mortgage brokers were riskier than the mortgages that originated by Bank of America, the lawsuit alleges. Furthermore, the bank reportedly received information that those wholesale mortgages - those that originated with third-party mortgage brokers - were decreasing in quality and performance, but that information was not passed on to investors.
Bank of America also allegedly did not conduct due diligence on the loans included in the securities, allowing mortgages that did not meet their underwriting standards to be included in the pool and further allowed loans that had overstated income, inflated appraisals, undisclosed debt and mortgage fraud to be included in the securities pool.
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The SEC also filed a complaint against Bank of America, alleging the bank did not inform investors about key risks associated with the mortgage-backed securities. According to the SEC’s news release (8/6/13), Bank of America’s former CEO referred to the wholesale loans as “toxic waste,” but did not publicly file material information regarding risks such as early defaults and underwriting defects, nor did the bank let all investors know about these risks.