Bank of America Corp has reached a record $500 million settlement with investors who claimed they were misled by its Countrywide unit into buying risky mortgage debt.
The settlement is the largest to resolve federal class-action litigation over mortgage-backed securities, surpassing a $315 million accord with the bank's Merrill Lynch unit that won court approval last May.
Bank of America said the settlement resolves claims on about 80 percent of the unpaid principal balance of Countrywide-issued residential mortgage-backed securities, and 70 percent of similar claims against the bank overall.
The accord requires approval by U.S. District Judge Mariana Pfaelzer in Los Angeles.
It is separate from an $8.5 billion Bank of America settlement being reviewed in a New York state court over Countrywide securities.
The second-largest U.S. bank still faces mortgage litigation by the Federal Housing Finance Agency on behalf of mortgage financiers Fannie Mae and Freddie Mac, and by the insurer American International Group Inc.
"I don't think anyone's going to ever at this point declare victory," Bruce Thompson, the bank's chief financial officer, said on a conference call discussing first-quarter results. "We're moving through in a pretty meaningful way this pipeline of items."
Bank of America said it had by March 31 set aside enough money to cover the settlement, which resolves three consolidated lawsuits.
The Charlotte, North Carolina-based bank bought the former Countrywide Financial Corp for $2.5 billion in July 2008, but analysts have put the effective cost at more than $40 billion, reflecting lawsuits, loan buybacks and writedowns.
Other banks such as Goldman Sachs Group Inc, JPMorgan Chase & Co and Morgan Stanley still face lawsuits by investors who claim they were misled about mortgage debt.
In the Countrywide case, investors including Dubai's Mashreq Bank and public and union pension funds in California, Maine, Nevada, Vermont and Washington state claimed they were misled about the risks of securities they bought between 2005 and 2007.
At the time, Countrywide was the largest U.S. mortgage lender, and specialized in loans to people who had weak credit histories or could not fully document their ability to pay.
The Countrywide litigation at one time covered roughly $352 billion of securities. Pfaelzer, however, significantly narrowed the case by ruling that investors could sue over only securities they bought, not those with similar qualities.
Spencer Burkholz, a partner at Robbins Geller Rudman & Dowd who represents some of the plaintiffs, estimated that about $15 billion of securities remained in the litigation.
But he said the $500 million payout, equal to more than 3 percent of principal before fees and costs, compares favorably to the roughly 1.9 percent multiple in the Merrill settlement.
"Considering the complexities and the bank's defenses, it's a great recovery, especially when compared with earlier settlements," Burkholz said in a phone interview.
Settlement papers are expected to be made public by the end of May, according to Steven Toll, a lawyer for other plaintiffs.
The amount of legal fees to be awarded is unclear. They totaled $53.6 million, or 17 percent of the settlement amount, in the Merrill settlement approved by U.S. District Judge Jed Rakoff in Manhattan, court papers show.
They totaled $24.5 million, or nearly 20 percent, of a $125 million settlement by Wells Fargo & Co, now the largest U.S. mortgage lender, that was approved by U.S. District Judge Lucy Koh in San Jose, California.
The Countrywide cases are in the U.S. District Court, Central District of California. They are Maine State Retirement System v. Countrywide Financial Corp et al, No. 10-00302; Western Conference of Teamsters Pension Plan v. Countrywide Financial Corp et al, No. 12-05122; and Luther v. Countrywide Financial Corp et al, No. 12-05125.
(Reporting by Jonathan Stempel in New York; additional reporting by Avik Das in Bangalore; editing by Martha Graybow, Maureen Bavdek, John Wallace and Matthew Lewis)