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Fed Clears Bank Of America-Countrywide Merger

BofA says it will tighten lending guidelines

June 8, 2008

The purchase of Countrywide would make Bank of America the nation's largest mortgage lender and loan servicer and would significantly expand the company's consumer real estate product offerings.

"This transaction represents a rare opportunity for Bank of America to significantly gain market share in the mortgage business, allowing it to expand in a cornerstone financial product," said Bank of America Chairman and Chief Executive Officer Kenneth D. Lewis.

The company said Countrywide customers would eventually gain access to a broad set of consumer financial products such as credit cards and deposit services.

"Mortgages continue to be a key consumer product for Bank of America, serving as a driver for adding new customers and deepening relationships with existing ones," Lewis said. "Countrywide, through its systems, distribution network and servicing platform, will give Bank of America greater ability to meet customers' credit needs."

In April 2008, Bank of America signaled that it planned to do business differently than Countrywide has conducted it in the past. In testimony before the Federal Reserve in Chicago, Bank of America Global Consumer Credit Executive Bruce Hammonds unveiled his company's new mortgage lending guidelines.

Following the purchase, the combined mortgage business plans to offer retail customers the following types of first-lien mortgages:

• Conforming loans underwritten to standard guidelines of government-sponsored enterprises and the government, including FHA and VA loans and other loans designed for low-and moderate-income borrowers.

• Interest-only fixed-rate and adjustable-rate mortgages (ARMs) that are subject to a 10-year minimum interest-only period, which lessens the possibility of short-term payment shock.

• Fixed-period ARMs that provide borrowers low initial rates with the security of fixed payments, subject to protections against steep increases in payment amounts. One thing Countrywide will not be doing is originating subprime mortgages. Following the purchase, Bank of America said it will make other changes to the loan products offered by the combined mortgage business:

• Discontinue non-traditional mortgages where monthly payments may not cover all interest, or so-called option-ARMs.

• Significantly curtail other non-traditional mortgages, such as certain low documentation loans.

• Implement enhanced borrower protections soon after completion of the Countrywide purchase, including limits on prepayment penalties and protections on non-traditional loans such as interest-only and hybrid ARMs, which limit the risk of future payment shock and provide long-term affordability.

"We think it's important to clearly explain the changes in mortgage lending practices once we operate as a combined company," Hammonds said. "We recognize this tightening, by definition, restricts the availability of credit to some borrowers. However, this will help ensure that those who get loans can afford to repay them.

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