BofA Gets Partial Reprieve - Analyst Blog

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Ushering in some relief for Bank of America Corporation ( BAC ), 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 ( FNMA ) and Federal Home Loan Mortgage Corporation ( FMCC ) - which are now controlled by the government.

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 billion.

Other Lawsuits

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 with MBIA Inc . ( MBI ) 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 bank.

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).

BANK OF AMER CP (BAC): Free Stock Analysis Report

FREDDIE MAC (FMCC): Get Free Report

FANNIE MAE (FNMA): Get Free Report

MBIA INC (MBI): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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