MONEY Banks

Bank of America Is Paying Up for the Mortgage Mess, But Who Will Get the Money?

Affordable housing construction
Kiet Thai—Getty Images

The banks has agreed to provide billions of dollars in "consumer relief." Here's what that actually means.

Last week, Bank of America agreed to pay almost $17 billion dollars in a settlement with the Justice Department. The settlement is about what Bank of America (and Merrill Lynch and Countrywide, which BoA later acquired) disclosed to investors about mortgage-backed securities, not about how it treated homeowners. Nonetheless, a large portion of the settlement—$7 billion—will be used for consumer relief.

So who will actually see some of that money? Bank of America can pay off its new obligation in four ways:

Reducing the principal or modifying payments on some mortgages. Mortgage modification isn’t anything new—the government has had programs to encourage banks to do this for years, though they’ve been criticized as too little or too late. However, compared to past settlements, the BoA deal does break some ground by targeting the relief. For the first time, 50% of principal reductions will go to borrowers in the areas hardest hit by the housing crisis. The Office of Housing and Urban Development has published an interactive map of these areas here. The settlement also gives the bank incentives to prioritize FHA and VA loans.

Bank of America’s agreement with the government also provides more substantial aid than previous settlements in certain cases. For example, BoA is required to provide $2.15 billion in principal forgiveness, which consists of lowering underwater mortgages to 75% of the property’s long term value, and reducing the mortgage’s interest rate to 2%.

“Those borrowers who do get assistance through the settlement are getting pretty substantial assistance,” says Paul Leonard, founder of the Center for Responsible Lending.

In addition to principal reduction, BoA will receive credit toward the settlement amount by forgiving mortgage payments, allowing for delayed payments, or extinguishing some second liens and other debts.

Who actually gets this help, though, is up to BoA. “Bank of America still gets to make all the final calls,” Leonard explains. “Even if I’m a borrower in default in a hardest hit area, who would seem like natural candidate for assistance, there is no entitlement to me.” As for the timetable, the bank has until 2018 to provide this aid, although the agreement includes incentive to finish early. BoA suggests anyone in serious hardship call 877-488-7814 to see if they qualify for an existing program.

More low and moderate income lending. For low-income Americans, first time homebuyers, or those who lost their home in a short sale or foreclosure, it can be extremely difficult to get a loan—even with a good credit. This settlement offers BoA credit for giving mortgages to these groups, or those in hardest hit areas, as long as they have respectable FICO score.

Building affordable rental housing. It’s also hard to find cheap rental housing, and financing for such development is scarce. As part of BoA’s agreement with the Justice Department, the bank will provide $100 million in financing for construction, rehabilitation or preservation of affordable rental multi-family housing. Half of these units must be built in Critical Family Need Housing developments.

Getting rid of blight and preventing future foreclosures. One side effect of the housing crisis was the large number of abandoned or foreclosed homes plaguing neighborhoods across the nation. BoA will earn credit for demolishing abandoned homes, donating properties to land banks, non-profits, or local governments, and providing funds for legal aid organizations and housing counseling agencies. The bank will also receive credit for forgiving the principal of loans where foreclosure isn’t being pursued.

Housing advocates say they’ll be keeping an eye on how quickly BoA and other banks that have agreed to consumer relief act on these programs. One worry is that by going slowly they could end up paying off the settlements with modifications and lending they would have done anyway. “If the promised relief arrives, as written, then it will bring a measure of relief that is badly needed by a lot of communities out there,” acknowledges Kevin Whelan, national campaign director of Home Defenders League. “But compared to the damage these institutions caused, it’s not really a large amount of money.”

Related:
What Bank of America Did to Warrant a $17 Billion Penalty
How to Get a Mortgage When Your Credit is Bad
Behind on Your Mortgage? You May Be Eligible for Some Help

MONEY alternative assets

How to Play Banker to Your Peers

IOU note
Getty Images

Lending Club's IPO filing puts peer-to-peer lending in the spotlight. If you're thinking about opening your wallet, here's what you need to know.

UPDATED—2:01 P.M.

Your bank makes money off borrowers. Now you have the opportunity to do the same. One of today’s hottest investments, peer-to-peer lending, involves making loans to strangers over the Internet and counting on them to pay you back with interest. The concept may be a bit wacky, but the returns reported by sites specializing in this transaction—from 7% to 14%—are nothing to scoff at.

Investors aren’t laughing either. Lending Club, one of the leading peer-to-peer lending companies, filed to go public on Wednesday. The New York Times reports the company is seeking $500 million as a preliminary fundraising target and may choose to increase that figure.

Such lofty ambitions should be no surprise, considering that the two biggest P2P sites are growing like gangbusters. With Wall Street firms and pension funds pouring in money as well, Lending Club issued more than $2 billion of loans in 2013, and nearly tripled its business over the prior year. In July, Prosper originated $153.8 million in loans, representing a year-over-year increase of over 400%. The company recently passed $1 billion in total lending. “A few years ago I would have laughed at the idea that these sites would revolutionize banking,” says Curtis Arnold, co-author of The Complete Idiot’s Guide to Person to Person Lending. “They haven’t yet, but I’m not laughing anymore.”

Here’s what to know before opening your wallet.

How P2P Works

To start investing, you simply transfer money to an account on one of the sites, then pick loans to fund. When Prosper launched in 2006, borrowers were urged to write in personal stories. Nowadays the process is more formal: Lenders mainly use matching tools to select loans—either one by one or in a bundle—based on criteria like credit rating or desired return. (Most borrowers are looking to refi credit-card debt anyway.) Loans are in three- and five-year terms. And the sites both use a default investment of $25, though you can opt to fund more of any given loan. Pricing is based on risk, so loans to borrowers with the worst credit offer the best interest rates.

Once a loan is fully funded, you’ll get monthly payments in your account—principal plus interest, less a 1% fee. Keep in mind that interest is taxable at your income tax rate, though you can opt to direct the money to an IRA to defer taxes.

A few hurdles: First, not every state permits individuals to lend. Lending Club is open to lenders in 26 states; Prosper is in 30 states plus D.C. Even if you are able to participate, you might have trouble finding loans because of the recent influx of institutional investors. “Depending on how much you’re looking to invest and how specific you are about the characteristics, it can take up to a few weeks to deploy money in my experience,” says Marc Prosser, publisher of LearnBonds.com and a Lending Club investor.

What Risks You Face

For the average-risk loan on Lending Club, returns in late 2013 averaged 8% to 9%, with a default rate of 2% to 4% since 2009. By contrast, junk bonds, which have had similar default rates, are yielding 5.7%. But P2P default rates apply only to the past few years, when the economy has been on an upswing; should it falter, the percentage of defaults could rise dramatically. In 2009, for example, Prosper’s default rate hit almost 30% (though its rate is now similar to Lending Club’s). Moreover, adds Colorado Springs financial planner Allan Roth, “a peer loan is unsecured. If it defaults, your money is gone.”

How to Do It Right

Spread your bets. Lending Club and Prosper both urge investors to diversify as much as possible.

Stick to higher quality. Should the economy turn, the lowest-grade loans will likely see the largest spike in defaults, so it’s better to stay in the middle to upper range—lower A to C on the sites’ rating scales. (The highest A loans often don’t pay much more than safer options.)

Stay small. Until P2P lending is more time-tested, says Roth, it’s best to limit your investment to less than 5% of your total portfolio. “Don’t bank the future of your family on this,” he adds.

TIME Companies

Here’s How Much Banks Have Paid Out Since the Financial Crisis

Bank of America's new settlement with the Justice Department is among the largest

The Bank of America deal announced Thursday, the government’s largest-ever settlement with a single company, means the nation’s second-biggest bank will shell out $16.65 billion over allegations that it knowingly sold toxic mortgages to investors.

The landmark agreement is a win for the government—particularly the Department of Justice, which spearheaded the probe—after drawing criticism for its sometimes weak response to the financial crisis in 2008. The sum surpasses Bank of America’s entire profits last year and is significantly higher than the $13 billion it offered during negotiations in July.

But the deal also caps a string of settlements that the Justice Department and other regulators have imposed on banks in the wake of the recession. Since the crisis, the six largest banks by assets have paid more than $123.5 billion in settlements over faulty mortgages, according to previous data from SNL Financial and incorporating the latest settlement. Authorities have forced the banks to pay the majority of that amount, and more deals are likely: Goldman Sachs and Wells Fargo are both reportedly on deck.

Here are seven of the largest government settlements:

$25 Billion
Wells Fargo, J.P. Morgan Chase, Citigroup, Bank of America, Ally Financial
February 2012

In what President Barack Obama called a “landmark” settlement, five of the nation’s largest banks agreed to a $25 billion settlement with 49 states and the feds to end an investigation into faulty foreclosure practices (Oklahoma reached a separate deal). Most funds were directed toward mortgage relief.

$16.65 Billion
Bank of America
August 2014

The settlement announced on Aug. 21 includes $7 billion for consumer relief, such as mortgage modification and forgiveness, and $9.65 billion in cash. But the deal doesn’t absolve the Charlotte-based bank of future criminal claims or claims by individuals.Bank of America has paid more than $60 billion in losses and legal settlements spawning from troubled mortgages—the most of any bank.

$13 Billion
J.P. Morgan Chase
November 2013

The largest U.S. lender agreed to what was then a record-setting settlement with the Justice Department over its role in the sale of the mortgages. “JPMorgan was not the only financial institution during this period to knowingly bundle toxic loans and sell them to unsuspecting investors, but that is no excuse for the firm’s behavior,” Holder said at the time.

$11.6 billion
Bank of America
January 2013

The bank, which acquired the mortgage lender Countrywide Financial in 2008, agreed to a $11.6 billion settlement over claims that it and Countrywide improperly sold mortgages to Fannie Mae.

$9.5 billion
Bank of America
March 2014

Ahead of the Justice Department settlement, Bank of America agreed to pay $9.3 billion to settle additional allegations that it sold faulty mortgages to Fannie Mae and Freddie Mac.

$9.3 Billion
Thirteen Banks
February 2013

Federal regulators finalized a deal with thirteen lenders — including the three largest — for faulty processing of foreclosures. The sum allowed for borrowers who went through foreclosure to access up to $125,000.

$7 Billion
Citigroup
July 2014

Citigroup, the third-largest bank, and the Justice Department announced the deal in July amid allegations that the company misled investors about the mortgage-backed securities. The settlement, which included about $2.5 billion for consumer relief, surprised some analysts by its size, but was a harbinger of what was in store for Bank of America in the coming weeks.

MONEY financial crisis

What Bank of America Did to Warrant a $17 Billion Penalty

A protester holds up a sign in front of the Bank of America as a coalition of organizations march to urge customers of big banks to switch to local credit unions in San Diego California November 2, 2011.
Mike Blake—Reuters

It's the biggest settlement ever between a corporation and the U.S. government. Here's what it reveals about how bankers inflated the housing bubble.

Bank of America has agreed to pay $16.65 billion dollars in penalties—the largest settlement ever between the U.S. government and a private corporation—for its role in the financial crisis. As Attorney General Eric Holder said Thursday morning, the payout will help “hold accountable those whose actions threatened the integrity of our financial markets and undermined the stability of our economy.”

So what did Bank of America actually do? As part of the settlement, the Justice Department has issued a 30-page “Statement of Facts,” signed by the bank, detailing the actions Bank of America is paying for today. The document includes events that took place at Merrill Lynch and Countrywide, which Bank of America later acquired. It’s full of e-mails and statements from employees and executives, which often make for infuriating, if sometimes grimly funny, reading.

Here’s what happened. In the years leading up to the financial crisis, Bank of America and Merrill Lynch sold various securities based on home loans. If the buyers paid their loan back, investors made money, but if too many defaulted, investors lost. To make sure investors knew what they were getting into, the two companies were required to report to investors on how safe these loans actually were.

The problem? Both BoA and Merrill, the statement says, knew with increasing certainty that many of their loans were troubled or at least likely to be risky, and didn’t fully disclose this.

At Merrill, one consultant in the company’s due diligence department complained in an email:

[h]ow much time do you want me to spend looking at these [loans] if [the co-head of Merrill Lynch’s RMBS business] is going to keep them regardless of issues? . . . Makes you wonder why we have due diligence performed other than making sure the loan closed.

The Merrill email pales next to the almost-cartoonish cynicism on display in some Countrywide emails. In addition to selling mortgage-backed securities, Countrywide was on the front lines giving mortgages to home buyers. Justice Department documents suggest that the company increasingly offered loans to almost anyone who walked in the door. What mattered was whether the loan could later be sold to someone else. Wrote one exec:

My impression since arriving here, is that the company’s standard for products and Guidelines has been: ‘If we can price it [for sale], then we will offer it.’

In an email from 2007, another executive reflected that:

[W]hen credit was easily salable… [the desk responsible for approving risky loans] was a way to take advantage of the ‘salability’ and do loans outside guidelines and not let our views of risk get in the way.

Because why should a mortgage company care about risk?

But what makes Countrywide special isn’t just that they gave out a lot of bad loans, it’s that they sold those bad loans to others while keeping the good ones for themselves. In a 2005 email, the Countrywide Financial Corporation (CFC)’s chairman—not named in the statement, but it was Angelo Mozilo—wrote that he was “increasingly concerned” about a certain adjustable rate loan. He feared that the average borrower was not “sufficiently sophisticated to truly understand the consequences” of their mortgage, making them increasingly likely to default. He wrote:

…the bank will be dealing with foreclosure in potentially a deflated real estate market. This would be both a financial and reputational catastrophe.

So what did Countrywide do about it? Sell the products on the secondary market, and keep only the mortgages given to more qualified buyers. According to the settlement document, Countrywide’s public releases “did not disclose that certain Pay-Option ARM loans included as collateral were loans that Countrywide Bank had elected not to hold for its own investment portfolio because they had risk characteristics that [Countrywide Financial Corporation] management had identified as inappropriate for [Countrywide Bank].”

In another email, this time from 2006, CFC chairman Mozilo explicitly spelled out this policy to the president of Countrywide Home Loans, writing:

important data that could portend serious problems with [Pay- Option ARMs]. Since over 70% have opted to make the lower payments it appears that it is just a matter of time that we will be faced with a substantial amount of resets and therefore much higher delinquencies. We must limit [CB’s retained investment in] this product to high ficos [credit scores] otherwise we could face both financial and regulatory consequences.

What do you know? Looks like those “financial and regulatory consequences” happened anyway.

TIME Money

Bank of America To Pay Record $16.65 Billion Fine

Bank Of America Reports Loss Due 6 Billion Dollar Legal Charge
Spencer Platt—Getty Images

$7 billion of it will go to consumers faced with financial hardship

Updated: 10:14 a.m.

The Justice Department announced Thursday that Bank of America will pay a record $16.65 billion fine to settle allegations that it knowingly sold toxic mortgages to investors.

The sum represents the largest settlement between the government and a private corporation in the United States’ history, coming at the end of a long controversy surrounding the bank’s role in the recent financial crisis. In issuing bad subprime loans, some observers say, the bank helped fuel a housing bubble that would ultimately burst in late 2007, devastating the national and global economy.

“We are here to announce a historic step forward in our ongoing effort to protect the American people from financial fraud – and to hold accountable those whose actions threatened the integrity of our financial markets and undermined the stability of our economy,” Attorney General Eric Holder said at a news conference announcing the settlement.

Since the end of the financial crisis, the bank has incurred more than $60 billion in losses and legal settlements. Of the latest settlement, $7 billion will go to consumers faced with financial hardship. In turn, the bank largely exonerates itself from further federal scrutiny.

However, not all is forgotten. The New York Times reports that federal prosecutors are preparing a new case against Angelo Mozilo, the former chairman and chief executive officer of Countrywide Financial, which Bank of America acquired in mid-2008. As the country’s largest lender of mortgages, Countrywide Financial purportedly played a large role in distributing toxic loans. Mozilo has already paid the Securities and Exchange Commission a record $67.5 million settlement.

MONEY Saving

WATCH: How You Can Save More Money

Financial planning experts share easy ways you can trick yourself into saving more money.

MONEY mortgages

WATCH: How You Can Benefit from Easier Mortgages

Mortgage loans are easier to get now. Here's how you can take advantage of it.

TIME Banks

U.S. Regulators: Wall Street’s Largest Banks Still Too Big To Fail

Bank Of America Reports Loss Due 6 Billion Dollar Legal Charge
Spencer Platt—Getty Images

The biggest banks still don't have adequate bankruptcy plans to avoid precipitating another economic crisis, said U.S. regulators

Eleven of the nation’s largest banks still do not have viable bankruptcy plans that would avoid causing widespread economic damage, U.S. regulators said Tuesday in a sweeping admonition of Wall Street’s giants.

The Federal Reserve and the Federal Deposit Insurance Corp said that the bankruptcy plans submitted by the 11 biggest banks in the United States fail to prepare for an orderly failure, have “unrealistic or inadequately supported” assumptions and do not properly outline changes in firm structure that would prevent broader economic repercussions.

“…[T]he plans provide no credible or clear path through bankruptcy that doesn’t require unrealistic assumptions and direct or indirect public support,” said Thomas Hoenig, the second-in-command official at the FDIC, in a statement.

Banks are required to submit an annual “living will” under the 2010 Dodd-Frank law, a legacy of the financial crisis of 2007-2008, in which the bankruptcy of Lehman Brothers was a precipitating factor in the economic crash that led to the Great Recession.

Regulators called for banks to create “living wills” to plan for a bankruptcy process that would not require the billions of dollars in taxpayer money doled out during the financial crisis, when many of Wall Street’s biggest financial institutions had to borrow billions from the Treasury to avoid disastrous collapse.

With Tuesday’s announcement, the large banks face the threat of tougher capital rules and restrictions on growth if they do not address the issues by July 2015.

“Too big to fail is alive and well. The FDIC’s statement that these living wills are not credible means that megabanks will live on taxpayer life support in the event of a crash,” said Sen. Sherrod Brown (D., Ohio), a proponent of legislation to increase capital requirements for the biggest banks, the Wall Street Journal reports.

Tuesday’s findings apply to banks with assets greater than $250 billion in assets, including Bank of America, Citigroup, Goldman Sachs, J.P. Morgan Chase, Morgan Stanley, Deutsche Bank, Credit Suisse, Barclays and others.

TIME Innovation

Five Best Ideas of the Day: August 4

1. Making the punishment fit the crime: A better way of calculating fines for the bad acts of big banks.

By Cathy O’Neill in Mathbabe

2. Lessons we can share: How three African countries made incredible progress in the fight against AIDS.

By Tina Rosenberg in the New York Times

3. Creative artists are turning to big data for inspiration — and a new window on our world.

By Charlie McCann in Prospect

4. We must give the sharing economy an opportunity to show its real potential.

By R.J. Lehmann in Reason

5. Technology investing has a gender problem, and it’s holding back innovation.

By Issie Lapowsky in Wired

The Aspen Institute is an educational and policy studies organization based in Washington, D.C.

MONEY Banking

Stuck Paying Overdraft Fees? One Simple Rule to Not Be a Sucker

Hand holding large lollipop
Yulia M.—Getty Images/Flickr

A tiny portion of bank customers pays nearly three-quarters of all overdraft fees, to the tune of $380.40 annually per account—and some $31 billion total.

Before getting into the nitty-gritty of a new government report about overdraft fees, and before reviewing the recent history and some of the staggering statistics regarding these much-maligned bank fees, let’s cut to the chase and give some straightforward advice:

DON’T OPT IN to overdraft protection.

You may have done so after thinking that “protection” sounds like it’s good for you. Heck, you may have no idea that you’re actually signed up for such a service. (An overdraft, by the way, is when you pay for something with a check or debit card and don’t have enough money in your account to cover the tab, prompting a bank fee to kick in, likely in the neighborhood of $35. When you don’t have overdraft protection and don’t have a sufficient account balance to cover a purchase, your card will be declined, and there will be no fee assessed.) If you’re not sure, check with your bank to check your status. And whether you’ve opted in consciously or unwittingly, give serious thought to opting out. Like, now.

Okay, now that that’s out of the way, let’s run through how we got to where we are today, and why even as reforms have helped consumers save money, they come up way short compared to how consumers can help themselves.

The total amount and frequency of customers paying overdrafts have been declining. American customers collectively paid a whopping $37 billion in 2009 in overdrafts, one of the more outrageous factoids helping to bring about the creation of the CFPB (Consumer Financial Protection Bureau), as well as the Occupy Wall Street protests. After rules were put in place requiring bank customers to opt in to overdraft protection, rather than be signed up automatically for it, the total shrunk to $31.6 billion in 2011, and remains at around $31 billion annually.

On the one hand, consumers are paying $6 billion less in overdraft fees compared to five years ago. On the other, we’re still paying $31 BILLION each year on a fee that bank reforms were supposed to rein in. Why is the figure still so high?

A study released last week from the Consumer Financial Protection Bureau provides some answers. The vast majority of bank customers actually pay no overdraft fees whatsoever. Seven out of ten accounts incur zero overdrafts annually, and 82% of customer accounts are hit with three or fewer overdrafts per year.

Therefore, it’s a very small portion of customers who are paying the lion’s share of overdraft fees. According to the CFPB, 8.3% of bank customers overdraft more than 10 times annually, and they’re collectively responsible for a mind-boggling 73.7% of overdraft fees collected by banks. Who are these people, who pay on average $380.40 in overdraft fees? The data in the report reveals a profile of the prototypical frequent overdrafter:

They’re young and inexperienced. Nearly 11% of customers ages 18 to 25 have 10+ overdrafts annually, compared to less than 3% of those age 62+.

They make small, frequent purchases with debit cards. Consumers who use their debit cards more than 30 times per month were more likely to be frequent overdrafters, with 18% incurring 10+ overdrafts per year. And the purchases that sent them into a negative balance tended to be small, with a median amount of just $24.

They pay back the money soon. More than half of accounts are back in a positive balance within three days, and three-quarters are positive within a week of overdraft. This tells us that an overdraft is often a matter of sloppiness—absentmindedly paying for a small purchase without realizing the money wasn’t there to cover the bill, then quickly making a deposit or transferring money from another account to get out of a negative balance. By then, however, the customer has already been hit with a fee (one likely higher than the median $24 mentioned above), and paid back a loan that equates to an annual rate of 17,000%, as the CFPB put it.

They’ve opted in. Well, duh. A little over 14% of bank customers have opted in to overdraft protection, and unsurprisingly, they tend to get hit with more overdraft fees. (In unusual circumstances, overdraft fees can be assessed even if you haven’t opted in.) The average checking account that has opted in is hit with $21.61 in overdraft fees monthly, compared to $2.98 for those who haven’t opted in. What’s more, those who opt in tend to pay more in other kinds of bank fees too, including maintenance and ATM fees.

If the portrait above sounds like you, the obvious advice is that it’s high time to start paying more attention to where you bank, how you spend, and whether or not you’ve opted in to overdraft protection. If you have, OPT OUT.

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