First BanCorp will pay the Securities and Exchange Commission $8.5 million to settle charges that it incorrectly represented more than $4 billion worth of transactions involving so-called non-conforming residential mortgages. The SEC has been investigating First BanCorp for two years, but amid the ongoing home-lending meltdown, the settlement may mark the beginning of more concerted SEC efforts against companies for incorrect accounting treatments of subprime mortgages.

It also marks a near-resolution of the financial troubles that have ensnared First BanCorp since the SEC began its investigation two years ago. Its inquiry focused on transactions between First BanCorp and its business partner Doral Financial, which along with First BanCorp is one of the largest financial institutions in Puerto Rico. Both are listed on the New York Stock Exchange.

By settling with the SEC, First BanCorp is not admitting or denying wrongdoing. “We have cooperated fully with the SEC since the beginning of their investigation, and with this settlement, are pleased to complete another significant step by resolving the investigation,” said Luis Beauchamp, president and CEO.

According to the SEC, the commission has been focusing on financial reporting issues related to the mortgage industry. “Investors deserve accurate disclosure and responsible accounting in all sectors of the marketplace,” said Linda Chatman Thomsen, director of the SEC’s Division of Enforcement.”

In its complaint against First BanCorp, the SEC alleged that the firm purchased non-conforming mortgages, which can include subprime mortgages, from Doral, and subsequently profited by earning more than $100 million in net interest income. These types of mortgages have looser requirements for loan recipients’ credit histories and income.

The problem with the transactions, according to the SEC, is how First BanCorp accounted for them. The firm should not have recognized the mortgage-related transactions as true sales because Doral’s senior managers had agreed through conversations and e-mails to extend a recourse provision from a two-year period to full recourse for the mortgages’ duration. However, neither firm disclosed that a change had been made to their written agreements in their financial statements, according to the SEC.

Indeed, the firm’s audit committee later investigated whether First BanCorp should have recorded mortgage loans purchased from two financial institutions between 2000 and 2004 as loans rather than purchases under FAS 140.

In addition, the SEC claims, First BanCorp’s CEO and CFO at the time hid the terms of the oral agreement from the firm’s independent auditor. They also allegedly used improper methods to avoid having to issue a restatement of the company’s financials. According to the SEC, this involved backdating hedging documents to make the firm’s external audit firm believe that they had been created when the mortgage-related transactions began in order to satisfy the requirements under FAS 133, Accounting for Derivate Instruments and Hedging Activities.

CEO Angel Alvarez Perez and CFO Annie Astor Carbonnell resigned from the company soon after the SEC began its informal investigation into First BanCorp’s finances in August 2005.

The firm ended up undertaking a large restatement last year. It involved five years’ worth of financials from 2000 to 2004 and the reclassification of how it had treated mortgage-related transactions and interest rate swaps. The restatement decreased the company’s earnings and legal surplus by approximately $17.1 million.

The SEC’s settlement announcement on Tuesday comes one day after First BanCorp announced a federal court had issued preliminary approval for the settlement of a class-action lawsuit lobbing similar complaints again the company. The firm plans to pay $74.25 million by the end of the year to end the suit.

The payouts should not affect its current earnings. Anticipating a possible settlement in both instances, the firm had put aside $74 million to settle with its shareholders and $8.5 million for the SEC in 2005.

Also last year, Doral Financial agreed to settle its own SEC charges of questionable accounting methods for floating rate, interest only securities by paying the regulator a $25 million penalty.