Bank of America, which spent $4 billion to buy Countrywide, now must pay $8.5 billion settlement to Countrywide investors

Introduction

Billion-dollar settlement – Bank of America Corp. today announced a huge $8.5 billion settlement with two dozen big investors who lost money on mortgage-backed securities, a deal first reported by the Wall Street Journal.

A group of 22 investors including giant BlackRock Inc., MetLife Inc. and the Federal Reserve Bank of New York hold mortgage-backed securities, originally valued at $105 billion, bought from Countrywide Financial Corp. before it was acquired by Bank of America. The investors claim Countrywide misled them about the quality of the borrowers and collateral behind the securitized mortgages they purchased.

The settlement of $8.5 billion is bigger than all profits earned by the bank since the financial crisis began in 2008 — and it’s more than double what BofA spent to acquire Countrywide that same year.

Federal vs state power – Some 48 state attorneys general, consumer groups, and even a senior Treasury Department official are complaining that the Office of the Comptroller of the Currency is trying to sidestep the Dodd-Frank law by continuing to pre-empt, or ignore, state consumer protection laws.

The Conference of State Bank Supervisors says the federal bank regulator’s plan is “nothing short of an effort to preserve a [preemption] standard that Congress has clearly rejected.” George Madison, general counsel for the Treasury Department, took the rare step of publicly criticizing the comptroller — an independent agency within the department — for failing to follow the Dodd-Frank law.

Big banks and the American Bankers Association support the Comptroller’s planned interpretation of the law. The comment deadline ended Tuesday on the Comptroller’s plan, and the agency must now analyze public feedback before finalizing its regulations.

Auto financing – Car dealers’ financing practices may get attention from the Consumer Financial Protection Bureau and the Federal Trade Commission in coming months, an industry lawyer writes at AutoDealerMonthly.com.

Most likely to draw scrutiny, says Thomas Hudson, are dealers who “dummy up credit applications and supporting documents” to help credit applicants look better; those who add phantom equipment to car loan documents; and dealers who have never had their advertisements reviewed for federal and state requirements. “I expect that we will see some early efforts by the FTC and CFPB to determine who’s naughty and who’s nice,” Hudson writes.

Mortgage fraud – The number of suspicious activity reports for home loans jumped 31 percent in the first quarter of 2011, according to the federal Financial Crimes Enforcement Network. Why the rise? FinCEN, which collects the reports from banks, says it’s because lenders did extra reviews after receiving demands to repurchase poorly performing loans.

How to improve financial literacy – So-called “behavioral economics” may help consumers more than creating a bureaucracy to certify the effectiveness of financial literacy programs, the Government Accountability Office says. The behavioral approach includes things like automatically enrolling new hires in a 401(k) plan unless they explicitly opt out; simplifying investment options to avoid information overload; and motivating consumers to take action by showing that their peers are already doing so. The Consumer Financial Protection Bureau, in a response attached to the report, did not endorse or reject certification.