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Bank of America Corporation (BAC - Analyst Report) has decided to settle the discrimination allegations brought by the government against it. The bank was accused of being prejudiced against disabled mortgage loan applicants.

As per the government, BofA dishonored the Fair Housing Act and the Equal Credit Opportunity Act by asking the disabled loan applicants to furnish invasive medical information from a medical practitioner. The company accepted its folly and is now looking to settle the matter.

BofA will engage an administrator to sort out 25,000 loan applications involving income from the Social Security Disabled Insurance (SSDI) to identify the victims. The company is willing to shell out $1,000, $2,500 or $5,000 to entitled mortgage loan applicants who were asked to present a letter from their doctor to document the income they got from SSDI.

This is not the first time that BofA is facing allegations pertaining to the violation of Fair Housing Act and the Equal Credit Opportunity Act. In December 2011, the bank paid out $335 million to the Department of Justice (DoJ) to settle civil charges against its Countrywide Financial unit.

The lawsuit against Countrywide stated that the company had used discriminating lending practices against qualified African-American and Hispanic borrowers on home loans. The Attorney General affirmed that these minority borrowers, who qualified for traditional mortgage rates, were pushed into subprime loans with higher interest rates.

Similar Settlements by Other Institutions

In July 2012, the DoJ announced that Wells Fargo & Company (WFC - Analyst Report) had agreed to pay nearly $175 million to settle civil charges against it. The settlement agreement was filed with the U.S. District Court in Washington, D.C. and awaits approval. The lawsuit alleged Wells Fargo of discriminatory lending practices against eligible African-American and Hispanic borrowers on home loans. Moreover, some of these borrowers were dragged into subprime mortgages.

Earlier in May, mortgage-lending unit of SunTrust Banks Inc. (STI - Analyst Report) decided to recompense the DoJ nearly $21 million to resolve civil charges against it. The lawsuit alleged SunTrust of discriminatory lending practices against suitable African-American and Hispanic borrowers on home loans.

Our Viewpoint

We believe that such settlements provide some relief to the companies and their shareholders since these reduce litigation overhang. However, the impact of these charges on a company’s financials and goodwill cannot be ignored.

Shares of BofA currently retain a Zacks #3 Rank, which translates into a short-term Hold rating. However, considering the fundamentals, we maintain a long-term ‘Neutral’ recommendation on the stock.

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