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Bank of America Corporation (BAC - Analyst Report) is on uncertain terrain again following the fresh charges against it filed by U.S. Bancorp (USB - Analyst Report) related to the sale of mortgage backed securities (MBS) that were allegedly backed by low-quality mortgages. The securities were worth $1.75 billion.

U.S. Bancorp acted as a trustee of Harbor View Mortgage Loan Trust 2005-10. In 2011, U.S. Bancorp accused BofA and its Countrywide Financial unit of misrepresenting the loans underlying the securities. The plaintiffs alleged that the loans carried a high default rate. U.S. Bank is seeking compensation for the damages it incurred, though no amount has been specified. Moreover, it seeks to obtain an order requiring BofA to repurchase the faulty loans.

However, a New York State Supreme Court in Manhattan dismissed a part of the lawsuit filed by U.S. Bancorp demanding repurchase of all the loans. Nevertheless, the court allowed the plaintiff to proceed with the charges seeking repurchase of 495 loans.

Similar Charges Earlier

U.S. Bancorp earlier also sued Citigroup, Inc. (C - Analyst Report) in connection with the sale of securities that were allegedly backed by low-quality mortgages. The securities were worth $1.08 billion.

Washington Mutual Inc., acquired by JPMorgan Chase & Co. (JPM - Analyst Report) in 2008 and Citigroup have also been sued in connection with the sale of MBS by Integer Program LLC for incurring huge losses from mortgage loans.

Notably, many global banking giants are recently battling similar lawsuits related to MBS.

Our Take

The mounting litigation charges against BofA will likely lessen its financial resources, which could otherwise have been channeled toward the company’s growth initiatives. Moreover, it is apprehended that litigation overhangs might tarnish the company’s image.

BofA currently carries a Zacks Rank #3 (Hold).

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