Ushering in some relief for
Bank of America Corporation
), a U.S. District Judge adjudicated that the United States can
proceed with certain parts of a civil lawsuit against the bank.
The case is related to the sale of thousands of faulty loans to
home-mortgage finance companies -
Federal National Mortgage Association
Federal Home Loan Mortgage Corporation
) - which are now controlled by the government.
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BofA had earlier pushed for a complete dismissal of the lawsuit,
which could be pursued under two laws - False Claims Act, often
used to seek justice for deceit against the government, and
Financial Institutions Reform, Recovery, and Enforcement Act,
1989 (FIRREA law) - which permit the government to seek civil
penalties against fraudulent practices that affect federally
insured financial institutions.
However, as per the federal judge's ruling, the claims in the
lawsuit were partly dismissed. The claims seeking penalties under
the False Claims Act were discarded, whereas those seeking
penalties under FIRREA were accepted.
It has been alleged that BofA deliberately schemed to deceive the
government-controlled mortgage finance companies through a
program that began at the former Countrywide Financial Corp,
acquired by the banking major in 2008. The government-controlled
mortgage finance companies incurred huge losses exceeding $1
BofA has also been sued by American International Group, Inc. for
causing the latter losses worth millions of dollars by selling
high-risk residential mortgage-backed securities (RMBS). However,
the U.S. District Judge partially dismissed the claim related to
misrepresentation of underwriting practices and deceptive
statements as well as allegations against underwriters Merrill
Lynch and Banc of America Securities.
However, the judge granted permission to AIG to pursue claims
related to fraudulent practices by BofA under which the latter
made false claims of complying with the underwriting guidelines
in its offer document. The court also permitted AIG to re-plead
its charges against BofA.
Recently, BofA reached an agreement to settle its legal tussle
) under which BofA is required to pay nearly $1.6 billion in cash
and return $137 million worth of MBIA's 5.70% senior notes
maturing in 2034. Further, BofA is required to provide a senior
secured credit facility worth $500 million to MBIA Insurance
Corp, MBIA's structured finance division.
Of late, the company has been encountering many lawsuits, some of
which are related to the sale of mortgage backed securities. The
partial dismissal of these lawsuits and settlement of agreements
are expected to provide some much needed reprieve to the troubled
Nonetheless, the piling litigation charges against BofA are
expected to mar its overall growth going forward. Further, such
legal suits are expected to lead to mounting legal expenses.
Moreover, it is apprehended that all these factors put together
will tarnish the company's image.
BofA carries a Zacks Rank #3 (Hold).