Bank Of America Settlement Will Cost It $12 Billion, At Least, And Here's Exactly Why

Remember when JPMorgan Chase agreed to pay a record-breaking $13 billion settlement last year? Well, Bank of America is about to top that. Bank of America's expected deal with the Justice Department could cost them $12 billion, on top of the $6 billion they've already agreed to paying for mishandling mortgage loans. This massive settlement, coupled with JPMorgan's, will help the Justice Department pressure other global financial institutions into paying up for their part in the 2008 financial crisis.

In March, Bank of America announced that it would be settling with the Federal Housing Finance Agency (FHFA) — which was conservator for the government-backed firms Fannie Mae and Freddie Mac —and New York Attorney General to the tune of $6.3 billion. That payout was to resolve FHFA's four lawsuits against the bank for falsely representing that their mortgage loans complied with certain standards. And now the additional $12 billion is going towards resolving civil probes made by the Justice Department and several states.

Attorney General Eric Holder has said that before he leaves his post, he wants to resolve as many of these high-profile probes as possible. He has also suggested using JPMorgan's deal as a template for any future settlement deals. So far, the terms of Bank of America's restitution are shaping up to be quite similar. Here's everything you need to know...

How Will the Settlement Be Used?

Much like the JPMorgan settlement, a portion of Bank of America's fee will go towards consumer relief. At least $5 billion will be "soft money" going towards helping the very people the bank's mortgage practices hurt, as opposed to "hard money," which goes towards paying fines. The $5 million will help homeowners reduce principal amounts, lower monthly payments, and contribute to blight removal in rundown neighborhoods.

How Will This Affect the Bank?

Spencer Platt/Getty Images News/Getty Images

Banks of this magnitude may seem invincible, but Bank of America, the second-largest bank in the country in terms of assets, will be taking a substantial hit with this record settlement. The $12 billion amount exceeds the institution's $11.43 billion profit in 2013, which was its highest profit in six years. Since the financial crisis of 2008, Bank of America has spent more than $60 billion in legal fees and to buy back mortgage securities.

Why Exactly Does It Need to Pay Up?

The short answer: It helped to push the global economy into the biggest recession since the Great Depression. According to the civil complaint, Bank of America lied to investors about the riskiness of certain mortgage-backed securities by misrepresenting the quality of the loans involved, failed to perform due diligence, and later made false statements about its conduct.

Loans that the firm had deemed as safe began to fail in large numbers, contributing to the housing market collapse. Fannie Mae and Freddie Mac had purchased billions of dollars' worth of those mortgage-backed securities before the financial collapse and required a government bailout when their investments were revealed to be shoddy.