By Andrew Jakabovics, Senior Director, Policy Development and Research; and Allison Charette, Research Analyst
Earlier today, Bank of America reached a record-setting $16.65 billion settlement agreement with the Department of Justice (DOJ) and six states’ attorneys general regarding residential mortgage-backed securities sold in the lead-up to the housing crisis. This deal follows settlement agreements made with Citigroup (Citi) last month and JPMorgan Chase (Chase) last year, as well as the National Mortgage Settlement (NMS) made in 2012. Similar to these previous agreements, in addition to paying fines and penalties to the government, Bank of America is obligated to assist struggling borrowers and communities through various consumer relief activities. Under the terms of the agreement, the bank’s creditable activities must total at least $7 billion and be completed by August 31, 2018 (see below for comparisons of the four settlements).
Similar in most respects to the Citi settlement reached in July, the consumer relief agreement of the Bank of America settlement is far more nuanced than those of Chase or the NMS. It prioritizes the most effective strategies in modifying loans to best assist struggling borrowers and adopts best practices in stabilizing communities. It also requires the bank to make financing available for the preservation and construction of affordable multifamily rental developments at a time in which the need for affordable rentals is growing.
This settlement requires deeper principal reductions than previous settlements, mandating that the bank reduce principal to no more than 75 percent loan-to-value (LTV) for their portfolio loans, coupled with a 2 percent permanent interest rate cap, and no more than 100 percent LTV for investor-owned properties. There are also increased incentives for deeper mods and credit for investor payments. The community reinvestment and neighborhood stabilization provisions have also been strengthened, eliminating credit for so-called “bank walkaways” by stipulating that credit is offered for lien releases only when the property is occupied. Under the Chase and Citi settlements, banks could get credit even if they stopped foreclosure on abandoned properties that fall into limbo and are often a source of blight on communities.
There are some additional differences between this settlement and the Citi settlement. They include:
- Bank of America receives a 15 percent incentive credit for completed modifications in Hardest Hit Areas beyond the requirement that half of all credit for modifications come from those areas
- Bank receives increased credit for forgiveness on FHA- and VA-insured loans
- A 50 percent enhanced early incentive credit for first-lien principal reductions completed by May 31, 2015 (in addition to the standard 15percent credit for all activities offered or completed by Aug. 31, 2015)
- Anti-blight activities include donations to nonprofits to facilitate reduction, rehabilitation or maintenance of abandoned and uninhabitable residential properties donated
- Affordable rental housing minimum obligation reduced to $100M from Citi’s $180M, including $35.7M dedicated to lending in New York
- Any funds not spent before Aug. 31, 2018 go to NeighborWorks (25 percent) and to state-based Interest on Lawyers’ Trust Account (IOLTA) organizations or other intermediaries that provide funds to legal aid organizations
Notably, until the Mortgage Forgiveness Debt Relief Act is reinstated, the bank must establish a fund for tax payments on consumer relief for homeowners. The fund will offset tax liability that consumers would incur when principal is forgiven. Under current law, debt forgiveness is treated as a taxable event with the amount forgiven considered as income. Without the offsetting payment, most borrowers given mortgage assistance would be hit with a significant tax bill as a result. Money paid into the fund does not count toward the bank’s $7 billion obligation for consumer relief.
Learn more about the consumer relief agreements made in previous mortgage settlements:
Understanding Citi’s Consumer Relief Obligations in Today’s Settlement
What the JPMorgan Chase Settlement means for Consumers: An Analysis of the $4 Billion in Consumer Relief Obligations