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Recently, a lawsuit was filed by a trust against a unit of Merrill Lynch – a unit of Bank of America Corporation (BAC - Analyst Report) – in the New York State Supreme Court in Manhattan. The lawsuit was associated with Merrill Lynch Mortgage Lending’s alleged infringement of representations and warranties regarding the sale of roughly 5,000 mortgages.

The litigation accused Merrill Lynch Mortgage Lending of failing to buy back loans as per the agreement stipulations in 2007. Further, the plaintiffs also accused Merrill Lynch and Sand Canyon – a unit of H&R Block, Inc. (HRB - Analyst Report) – of violating representations and warranties for other mortgage loans. Moreover, the litigation accused trustee Citibank N.A. – a unit of Citigroup, Inc. (C - Analyst Report) – of not taking enforcement actions against the alleged violations.

In 2007, Merrill Lynch securitized approximately 5,900 residential mortgage loans from 2 originators to serve as the basis for securities which were sold to investors. The loans were finally sold to Merrill Lynch Mortgage Investors and then given to the trust, before being sold to investors.

According to the plaintiff, both Merrill Lynch and Sand Canyon contravened the representations and warranties of these loans and therefore the trust sought more than $309 million in damages for the breach

In Dec 2007, Sand Canyon, previously known as Option One Mortgage Corp., stopped originating mortgage loans. Later its servicing assets were sold to American Home Mortgage Servicing and its remaining operations were discontinued in Apr 2008.

BofA has faced numerous lawsuits, specially associated with mortgage backed securities. These litigations would surely dent its reputation and be an overhang on its financials. However, we believe that the investors, who have lost their hard-earned money in such investments, should feel relieved.

BofA currently carries a Zacks Rank #3 (Hold). Other banks that are performing better include Meta Financial Group, Inc. (CASH - Snapshot Report), which carries a Zacks Rank #1 (Strong Buy).

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