As part of the settlement, BofA will pay $7bn as relief to affected homeowners.
The bank is also required to pay $5bn penalty under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) and $4.63bn in compensatory remediation payments.
The penalty being paid to FIRREA is the highest ever paid.
US attorney general Eric Holder said: "Under the terms of this settlement, the bank has agreed to pay $7bn in relief to struggling homeowners, borrowers and communities affected by the bank’s conduct.
"This is appropriate given the size and scope of the wrongdoing at issue."
The civil investigations found that BofA was involved in packaging, marketing, selling, structuring and issuing residential mortgage-backed securities, collateralized debt obligations, and followed faulty practices while underwriting and creating mortgage loans.
The lender also accepted that it misrepresented the quality of mortgage loans to Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA).
US associate attorney general Tony West said: "At nearly $17bn, today’s resolution with Bank of America is the largest the department has ever reached with a single entity in American history."
The state claims against BofA include its former and current subsidiaries Countrywide Financial Corporation and Merrill Lynch.
US attorney Paul J. Fishman for the district of New Jersey said: "In the run-up to the financial crisis, Merrill Lynch bought more and more mortgage loans, packaged them together, and sold them off in securities – even when the bank knew a substantial number of those loans were defective."
Image: The latest settlement will see Bank of America paying over $65bn to resolve mortgage issues. Photo: courtesy of User Jleon.
