Bank of America Corporation reached a settlement with the U.S. Securities and Exchange Commission over disclosures tied to $2.1 trillion in mortgage loans and residential mortgage-backed securities sold between 2004 and 2008, according to an administrative proceeding released by the SEC. Under the terms of the order, the bank consented to a cease-and-desist order and civil penalties after the regulator found failures in required periodic filings.
Mortgage Sales and Securitization Volume
Between 2004 and the first half of 2008, Bank of America and companies it later acquired in the second half of 2008 sold approximately $2.1 trillion of mortgage loans and residential mortgage-backed securities, according to SEC findings. Of that total, roughly $1.1 trillion consisted of mortgage loans sold to Government-Sponsored Enterprises, primarily the Federal National Mortgage Association, known as Fannie Mae, and the Federal Home Loan Mortgage Corporation, known as Freddie Mac. An additional $963 billion was sold to whole loan investors and into private label securitizations frequently purchased by large institutions. According to the SEC regulatory order, approximately $160 billion of those mortgage loans went into private label securitizations backed by credit enhancements from monoline insurers, with about $1.8 trillion of the overall loan amounts remaining outstanding as of December 31, 2009.
Representations, Warranties, and Repurchase Demands
In connection with these mortgage sales and securitizations, Bank of America and its acquired companies made contractual representations and warranties regarding the underlying loans, according to the SEC document. While terms varied by agreement and counterparty, these contractual assurances included provisions regarding good title, conformity with underwriting guidelines, enforceability of mortgage documents, lien position, and compliance with applicable laws. If a purchaser determined that a breach occurred, that buyer could assert a claim demanding that Bank of America repurchase the related mortgage loan at its outstanding unpaid principal balance, according to the regulatory filings.
Disclosure Failures Under Regulation S-K
The SEC administrative proceeding centers on Bank of America’s failure to make required disclosures in the Management’s Discussion and Analysis and Results of Operations sections of its periodic filings. Regulation S-K Item 303 requires registrants to disclose known trends or uncertainties that have had, or that the registrant reasonably expects will have, a material unfavorable impact on net sales, revenues, or income from continuing operations, according to the federal agency. The SEC determined that Bank of America’s failure to comply with these disclosure mandates constituted a violation of Section 13(a) of the Securities Exchange Act of 1934.
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