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JPMorgan Chase & Co. (JPM - Analyst Report) is being investigated by the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC) over the sale of risky residential mortgage backed securities (RMBS). This was disclosed by the company in its latest quarterly filings with the SEC.

In May 2013, JPMorgan received a notice from the Civil Division containing the preliminary inquiry’s conclusion. The conclusion stated that the company had violated several federal securitiy laws at the time of selling RMBS during 2005–2007. Additionally, the company has received several subpoenas and requests for information from federal and state authorities related to origination of mortgages and the sale of RMBS.

The regulators are scrutinizing as to whether JPMorgan made proper disclosures to the investors at the time of sale of MBS. Probes are also being conducted for potential infringement of securitization representations and warranties as well as due diligence related to RMBS.

Further, JPMorgan is being investigated by the civil and criminal divisions of the Attorney's Office for the Eastern District of California relating to MBS that were sold during 2005–2007.

Apart from these, JPMorgan is facing inquires from the Office of the Comptroller of the Currency (OCC) and the Consumer Financial Protection Bureau (CFPB). These regulators are investigating the company’s practices related to the collection and sale of credit card debt.

Notably, these are among several other lawsuits that JPMorgan faces related to its conduct preceding the financial crisis. Given this, at the end of second-quarter 2013, the company raised its projection of legal losses to $6.8 billion from $6.0 billion in the prior quarter.

The law enforcement agencies have taken an aggressive approach towards penalizing those responsible for the collapse of the financial market in 2008. Earlier this week, the DOJ and the SEC filed 2 separate civil lawsuits against Bank of America Corp. (BAC - Analyst Report) related to the sale of $850 million worth of RMBS in 2008.

Many other global banks including The Goldman Sachs Group, Inc. (GS - Analyst Report), Citigroup Inc. (C - Analyst Report), UBS AG (UBS - Analyst Report) and Morgan Stanley (MS - Analyst Report) are facing investigations and lawsuits related to the sale of risky MBS during the period prior to the financial crisis.

If following the completion of the investigation, the DOJ and the SEC file lawsuits against JPMorgan, it would inevitably lead to further rise in litigation costs and affect the bank’s image as well as financials.

Though the overall impact from such lawsuits is yet to be evaluated, these measures are somewhat reassuring as these are aimed at resisting malpractices related to the sale of MBS. Most importantly, such measures will likely impart the much needed transparency to banking procedures concerning the sale of MBS.

Currently, JPMorgan carries a Zacks Rank #2 (Buy).

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