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Bank of America Corporation (BAC - Analyst Report) continues to be embroiled in legal hassles. Recently, the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) filed 2 separate civil lawsuits against BofA related to the sale of residential mortgage backed securities (RMBS) in Jan 2008.

The lawsuits, filed in the U.S. District Court in Charlotte, N.C., accused BofA of investor fraud while selling RMBS worth $850 million. The company was imputed of misrepresenting the risks and failing to disclose proper information associated with the underlying securitization named BOAMS 2008-A.

Further, the lawsuits alleged that more than 40% of the 1191 loans in the above-mentioned RMBS did not fulfill BofA’s own underwriting standards. The company has been also accused of not conducting proper loan-level diligence on the mortgages that were used as collateral, leading to expense savings of $15,000.

Notably, the suits present details of email exchanges between BofA’s employees arguing about the appropriateness of the underlying loans for RMBS.

The investors who purchased these loans included Wachovia Bank National Association, which was later acquired by Wells Fargo & Company (WFC - Analyst Report) and the Federal Home Loan Bank of San Francisco.

Notably, while refuting the charges, BofA stated that the investors had sufficient access to underlying data. The company will further its defense against the claims made by the DOJ and the SEC in the court.

The filing of the lawsuit signals the government’s and regulators’ willingness to pursue litigations against banks and other financial institutions and to make them pay for their flawed business conduct that led to the collapse of the financial market in 2008.

The DOJ lawsuit has been filed under the Financial Institutions Reform, Recovery and Enforcement Act, which has a 10-year statute of limitations and therefore gives law enforcement agencies more time to sue financial institutions.

In a similar case, in February this year, Standard & Poor's Ratings Services (S&P) – a unit of McGraw Hill Financial, Inc. (MHFI - Analyst Report) – was sued by the DOJ for allegedly raising its credit ratings on risky RMBS prior to the financial crisis. However, S&P has denied these allegations.

Meanwhile, BofA continues to face lawsuits for sale of risky MBS and RMBS during the period before the financial crisis. Though the company has resolved some cases, others are still pending in courts.

Among major settlements, in 2011, BofA reached an $8.5 billion settlement deal with the private investors who had brought those risky MBS.  Further, in Jan 2013, the company resolved its case with Fannie Mae with the payment of $11.6 billion and in May 2013, agreed to pay $1.6 billion to MBIA Inc. for resolution of conflict over guarantees on commercial mortgage-backed securities.

However, a number of lawsuits are still pending in court, most of which are related to the sale of MBS by Countrywide Financial – acquired in 2008.

BofA still has a long way to go to regain its former image. The company has announced several initiatives that have now started bearing fruit. All such measures will lead to enhanced financial performance going forward.

Currently, BofA carries a Zacks Rank #3 (Hold).

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