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DOJ slams BofA with $850M RMBS suit

The Department of Justice slapped Bank of America and numerous subsidiaries with an $850 million lawsuit Tuesday, alleging the firms lied to investors about the quality of mortgages backing residential mortgage-backed securities sold off to investors.

The DOJ suit, which was worked in tandem with the U.S. Attorney for the Western District of North Carolina, accuses BofA (BAC) and several of its affiliates of intentionally making false statements, failing to perform due diligence on loans and packing securitization deals with a “disproportionate amount of risky mortgages originated through third party mortgage brokers.”

Attorney General Holder says the suit stems from the ongoing efforts of President Obama’s Financial Fraud Enforcement Task Force RMBS Working Group. The Securities and Exchange Commission filed similar civil charges in a Charlotte, N.C., federal court.

In the complaint, which was filed in the U.S. District Court in Charlotte, the government says BofA defrauded investors who acquired more than $850 million in RMBS from the Bank of America Mortgage Securities 2008-A (or BOAMS 2008-A) securitization. The DOJ also is seeking civil penalties under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 — talk of a lawsuit began last week.

As for what was misrepresented to investors, the DOJ and the U.S. Attorney's office contend BofA made many misstatements and omitted information about the quality and safety of loans collateralizing certain RMBS transactions. The statements delivered to investors made it difficult for them to assess whether the loans were in fact prime or risky, BofA claims.

The suit contends 40% of the 1,191 mortgages in the securitization failed to substantially comply with Bank of America’s underwriting guidelines when they were originated. Furthermore, these same loans contained few enhancements to justify their ratings, the government suggests.

The bank also is accused of failing to perform loan-level reviews at the time of securitization and of allowing the underlying collateral to pass through despite numerous origination problems from overstated income, fake employment, inflated appraisals, wrong loan-to-value ratios, undisclosed debt, occupancy issues and mortgage fraud.

The government also claims BofA received numerous internal reports warning them of significant declines in the quality and performance of various wholesale mortgages.

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