BofA Offers $13 Billion to Settle U.S. Mortgage Probe

Bank Met with Justice Department on Tuesday, but Made No Progress Toward Final Deal

Updated July 16, 2014 4:04 p.m. ET

Lawyers for Bank of America Corp. BAC -1.90% and the Justice Department met on Tuesday to continue negotiating a potential mortgage-securities settlement but remain far apart on the size and scope of the penalty, according to people familiar with the matter.

The bank is offering $13 billion, including cash and consumer relief, but the Justice Department wants a much heftier cash penalty, these people said. Another big sticking points is how the settlement would be structured, with Bank of America pushing for a bigger portion of the penalty to be paid in so-called soft money—such as consumer relief, these people said.

The Wall Street Journal reported last month that the bank was in talks to pay at least $12 billion.

The lack of progress leaves a legal cloud hanging over Bank of America, even as it said Wednesday it had resolved other private lawsuits over mortgages securities, including long-running securities lawsuits from the insurance company American International Group Inc. AIG -0.02% AIG had originally demanded about $10 billion in 2011, but the bank settled for $650 million and said it has now resolved 95% of the residential-mortgage-securities litigation it had been facing. That doesn't include any potential government settlements.


A deal between Bank of America and the Justice Department is far from certain. Lawyers for Bank of America had requested the meeting, which took place in Washington, but it ended with no progress made toward a final deal, people familiar with the discussions said. The bank wants most of the deal to be in soft money, where it gets credit for modifying mortgages for struggling homeowners and other moves that benefit customers in financial distress, while the Justice Department wants the Bank of America to significantly increase its offer on the cash penalty portion, they said.

If a deal can't be reached the U.S. would have to decide whether to file a lawsuit. A similar game of chicken played out with Citigroup Inc., C +1.08% which ultimately agreed to pay $7 billion to resolve its own mortgage-securities probe. That settlement was announced Monday.

The Justice Department official leading the high-stakes talks with Bank of America and other big banks over soured mortgage securities suggested in a speech Wednesday that the U.S. could bring lawsuits against institutions that don't offer to pay a big enough penalty and admit to their misconduct. Associate Attorney General Tony West said the Justice Department doesn't intend to settle mortgage-backed securities cases when it begins investigating them.

"We will not shrink from litigating as long as we must to fulfill our law enforcement mandate," Mr. West said, before mentioning ongoing lawsuits against Standard & Poor's Ratings Services and Bank of America Corp. "I would not be surprised if we were to see additional [residential mortgage-backed securities] lawsuits in the future."

He added that "resolving these cases will require more than simply seeking a meeting with the attorney general." The Justice Department has rebuffed requests from Bank of America Corp. to have its chief executive, Brian Moynihan, meet with Attorney General Eric Holder, according to people familiar with the matter.

Bank of America would be the third big bank to settle with the Justice Department over mortgage securities, after Citigroup and J.P. Morgan Chase & Co., which settled in November for $13 billion. The deals are a pivotal point for the Justice Department, which is under pressure to prove it is being tough on the industry for precrisis misdeeds, and the banks, which need to show shareholders they are putting crisis-era litigation behind them.

For the second quarter in a row, Bank of America on Wednesday took a big legal charge related to mortgage-securities settlements that skewered the quarter's earnings.

To date, the bank has shelled out about $60 billion since the crisis to settle lawsuits and buy back mortgage securities.

On Wednesday, the bank said it had set aside $4 billion in litigation expenses for "previously disclosed legacy mortgage-related matters"—likely a nod to both the AIG cases and the Justice Department negotiations. That is far greater than the $471 million the bank set aside this time a year ago.

The bank surprised analysts and investors in the first quarter when it set aside $6 billion for legal expenses, much of it for a previously disclosed mortgage-securities settlement with the Federal Housing Finance Agency, but a big chunk also in preparation for a Justice Department settlement.

For the quarter, Bank of America reported a profit of $2.29 billion, compared with $4.01 billion a year earlier. On a per-share basis, earnings were 19 cents. Analyst earnings estimates varied widely based on both the projections of litigation costs and whether the costs were included or excluded in the estimates.

Revenue dropped 4% to $21.75 billion, slightly higher than the expectations of analysts polled by Thomson Reuters for revenue of $21.61 billion.