The bank was slow in providing data and offered incomplete information, according to the U.S. Department of Housing and Urban Development inspector general’s office, which conducted the review.
“Our review was significantly hindered by Bank of America’s reluctance to allow us to interview employees or provide data and information in a timely manner,” William Nixon, an assistant regional inspector general for the agency, said in a sworn declaration.
The filing, dated June 1 and obtained yesterday by Bloomberg News, was submitted as an exhibit in a lawsuit by the state of Arizona against the Charlotte, North Carolina-based bank. Arizona, which is seeking to interview former Bank of America employees, accused the bank of misleading homeowners who were seeking mortgage modifications.
Federal agencies and attorneys general from all 50 states are investigating the way banks service mortgage loans and conduct foreclosures. The group is in settlement talks with the five largest mortgage servicers, including Bank of America, Wells Fargo & Co. (WFC) and JPMorgan Chase & Co.
New York Probe
Bank of America cooperated with the U.S. inquiry, said Dan Frahm, a company spokesman, adding “any suggestion otherwise is both inaccurate and inconsistent with how we work with all regulators.”
In addition to the 50-state probe, New York Attorney General Eric Schneiderman has opened a new inquiry tied to the packaging and sale of loans to investors, according to a person familiar with the matter. Bank of America is included in that probe along with other banks and bond insurers such as MBIA Inc.
Schneiderman’s office has sought information from additional financial institutions, two people familiar with the matter said. He requested documents from Deutsche Bank AG (DB) and Bank of New York Mellon Corp., which act as trustees for mortgage-bond trusts, said one of the people.
Between five and 10 trustees are being asked to provide information, said the person, who declined to be identified because the matter isn’t public.
New York and Delaware agreed to share information gathered from the trustees, said the person. The two states are interested in probing the way mortgages were pooled and securitized and have focused on the trustee banks because of their role in the process, said a second person, who also declined to be identified because the matter isn’t public.
One issue is whether loan documents were properly transferred to the trusts, the person said. The trusts issued securities to investors backed by the pools of mortgage loans. A second issue is the due diligence performed on the quality of the loans going into the trusts and the representations made to investors, the person said.
James Freedland, a spokesman for Schneiderman, declined to comment regarding the bank trustees. John Gallagher, a spokesman for Frankfurt-based Deutsche Bank, and Kevin Heine, a spokesman for Bank of New York, declined to comment.
The HUD inspector general’s office conducted reviews of the five largest mortgage servicers “as they relate to FHA loans that have been foreclosed upon” and for which the servicers claimed insurance benefits, according to Nixon’s declaration. The office sought to determine whether Bank of America complied with applicable procedures when conducting foreclosures on FHA- insured loans.
The U.S. Justice Department is suing Deutsche Bank, claiming it lied while arranging FHA insurance on mortgage loans and profited from the sale of the insured government mortgages. U.S. Attorney Preet Bharara in Manhattan said in May it wouldn’t be a “fantastical stretch” for prosecutors to scrutinize other lenders as well.
Deutsche Bank has called the claims in the lawsuit “unreasonable and unfair.”
The HUD inspector general’s report on Bank of America, which hasn’t been made public, was prepared “in light of possible future litigation,” according to Nixon’s declaration. Nixon, who works in Fort Worth, Texas, couldn’t be reached for comment.
Bank of America submitted 40,219 FHA claims totaling $5.7 billion from Oct. 1, 2008, through Sept. 30, 2010, according to the declaration. About 86 percent of its claims were for loans previously serviced by Countrywide Financial Corp., which Bank of America acquired in 2008.
Bank of America may face a further $27 billion of housing- related losses between now and 2013 amid increasing regulation as the economic recovery slows, analysts at Sanford C. Bernstein said in a note yesterday. The losses would be in addition to the $46 billion the lender has booked so far, analysts led by John E. McDonald wrote.
As long as Bank of America’s housing-related losses don’t exceed $55 billion, twice Bernstein’s estimate, it should manage to boost Tier 1 capital to 8.5 percent by 2013 and avoid raising more, the analysts said. About 44 percent of Bank of America’s total lending is linked to housing, compared with 34 percent at its competitors, Bernstein’s McDonald said.
The company will probably settle demands from private investors that it repurchase soured mortgages by paying about $7 billion this year, Mike Mayo, an analyst at Credit Agricole Securities USA in New York, wrote yesterday in a research note.
As part of the HUD inspector general’s review, Bank of America provided access to more than 55,000 pages of material and voluntarily coordinated interviews and assisted with arranging depositions with two dozen employees, Frahm, the bank spokesman, said in an e-mail yesterday.
According to Nixon’s declaration, when interviews with Bank of America employees were permitted, the presence or involvement of the bank’s attorneys “limited the effectiveness” of the interviews. Attorneys also refused to allow employees to answer questions “on a number of occasions.”
The bank’s delay in providing “readily available information” also hurt the review of the bank’s processes and controls, Nixon said. The information provided in response to two subpoenas wasn’t complete, he said.
“These omissions impaired our review because they prevented us from measuring the impact of Bank of America’s foreclosure practices,” Nixon said.
Bank of America rose 17 cents to $10.97 yesterday in New York Stock Exchange composite trading.
The case is Arizona v. Countrywide Financial Corp., CV2010- 033580, Arizona Superior Court, Maricopa County.
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