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Originally published Friday, June 17, 2011 at 10:00 PM

Bank of America faulted in foreclosure review

Bank of America Corp., the largest U.S. lender, "significantly hindered" a federal review of its foreclosures on loans insured by the Federal Housing Administration, the U.S. said.

Bloomberg News

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Bank of America, the largest U.S. lender, "significantly hindered" a federal review of its foreclosures on loans insured by the Federal Housing Administration, the U.S. said.

The bank was slow in providing data and offered incomplete information, according to the 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 last week by Bloomberg News, was submitted as an exhibit in a lawsuit by the state of Arizona against the Charlotte, N.C.-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 and JPMorgan Chase.

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 and Bank of New York Mellon, which act as trustees for mortgage-bond trusts, said one of the people.

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 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 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 were for loans previously serviced by Countrywide Financial, 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 last week. The losses would be in addition to the $46 billion the lender has booked so far, analysts led by John E. McDonald wrote.

Lending for housing

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 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 in New York, wrote 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, said Frahm, the bank spokesman.

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.

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