Bank of American (BOA) was charged along with two of its subsidiaries on Tuesday with defrauding investors who bought residential mortgage-backed securities (RMBS) from the firm. The Securities and Exchange Commission (SEC) alleges that the bank failed to tell investors that more than 70 percent of the mortgages backing the offer - called BOAMS 2008- posed vastly greater risks to the investors.

SEC said in its complaint, filed in U.S. District Court for the Western District of North Carolina in Charlotte where BOA is headquartered, that the bank, along with Banc of America Securities LLC (now Merrill Lynch, Pierce, Fenner & Smith) and Bank of America Mortgage Securities (BOAMS) conducted the $855 million RMBS offering in 2008.  It was promoted as a "prime" securitization appropriate for the most conservative RMBS investors during a time when such wholesale channel loans were being described by the Bank's then current CEO as "toxic waste."

SEC contends the loans carried greater risks of severe delinquencies, early defaults, underwriting defects, and prepayments, all of which would directly impact the returns to the RMBS investors, SEC said. BOA "only selectively disclosed the percentage of wholesale channel loans to a limited group of institutional investors.  Bank of America never disclosed this material information to all investors and never filed it publicly as required under the federal securities laws.'

"In its own words, Bank of America 'shifted the risk' of loss from its own books to unsuspecting investors, and then ignored its responsibility to make a full and accurate disclosure to all investors equally," said George S. Canellos, Co-Director of the SEC's Division of Enforcement.  "This is one in a long line of RMBS-related enforcement actions brought by the SEC to hold entities accountable for wrongdoing connected to the financial crisis."

The Department of Justice today announced a parallel civil action against Bank of America for violations of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA). 

Investors were allegedly told the loans were underwriten in conformity with the bank's own guidelines however SEC says they were 'riddled with ineligible appraisals, unsupported statements of income, misrepresentations regarding owner occupancy, and evidence of mortgage fraud.' Such key variables as debt-to-income rations and loan-to-value rations were routinely miscalculated as well.

The complaint says that BOAMS 2008-A suffered an 8.05 percent cumulative net loss rate through June 2013, the greatest loss rate of any comparable BOAMS securitization. This resulted in losses of nearly $70 million and anticipated future losses of approximately $50 million.

According to Reuters News Agency the lawsuit is seeking a permanent injunction against similar violations, civil penalties and "disgorgement of ill-gotten gains."