Back to top

Analyst Blog

Ushering in some relief for Bank of America Corporation (BAC - Analyst Report), a U.S. District Judge adjudicated that the United States can proceed with certain parts of a civil lawsuit against the bank. The case is related to the sale of thousands of faulty loans to home-mortgage finance companies – Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FMCC) – which are now controlled by the government.

BofA had earlier pushed for a complete dismissal of the lawsuit, which could be pursued under two laws – False Claims Act, often used to seek justice for deceit against the government, and Financial Institutions Reform, Recovery, and Enforcement Act, 1989 (FIRREA law) – which permit the government to seek civil penalties against fraudulent practices that affect federally insured financial institutions.

However, as per the federal judge’s ruling, the claims in the lawsuit were partly dismissed. The claims seeking penalties under the False Claims Act were discarded, whereas those seeking penalties under FIRREA were accepted.

It has been alleged that BofA deliberately schemed to deceive the government-controlled mortgage finance companies through a program that began at the former Countrywide Financial Corp, acquired by the banking major in 2008. The government-controlled mortgage finance companies incurred huge losses exceeding $1 billion.

Other Lawsuits

BofA has also been sued by American International Group, Inc. for causing the latter losses worth millions of dollars by selling high-risk residential mortgage-backed securities (RMBS). However, the U.S. District Judge partially dismissed the claim related to misrepresentation of underwriting practices and deceptive statements as well as allegations against underwriters Merrill Lynch and Banc of America Securities.

However, the judge granted permission to AIG to pursue claims related to fraudulent practices by BofA under which the latter made false claims of complying with the underwriting guidelines in its offer document. The court also permitted AIG to re-plead its charges against BofA.

Recently, BofA reached an agreement to settle its legal tussle with MBIA Inc. under which BofA is required to pay nearly $1.6 billion in cash and return $137 million worth of MBIA’s 5.70% senior notes maturing in 2034. Further, BofA is required to provide a senior secured credit facility worth $500 million to MBIA Insurance Corp, MBIA’s structured finance division.

Conclusion

Of late, the company has been encountering many lawsuits, some of which are related to the sale of mortgage backed securities. The partial dismissal of these lawsuits and settlement of agreements are expected to provide some much needed reprieve to the troubled bank.

Nonetheless, the piling litigation charges against BofA are expected to mar its overall growth going forward. Further, such legal suits are expected to lead to mounting legal expenses. Moreover, it is apprehended that all these factors put together will tarnish the company’s image.

BofA carries a Zacks Rank #3 (Hold).
 

Please login to Zacks.com or register to post a comment.

New to Zacks?

Start Here

Zacks Investment Research

Close

Are you a new Zacks Member or a visitor to Zacks.com?

Top Zacks Features

My Portfolio Tracker

Is it Time to Sell?

One of the most important steps you can take today is to set up your portfolio tracker on Zacks.com. Once you do, you'll be notified of major events affecting your stocks and/or funds with daily email alerts.

More Zacks Resources

Zacks Rank Home - Evaluate your stocks and use the Zacks Rank to eliminate the losers and keep the winners.

Mutual Fund Rank Home - Evaluate your funds with the Mutual Fund Rank for both your personal and retirement funds.

Stock/Mutual Fund Screening - Find better stocks and mutual funds. The ones most likely to beat the market and provide a positive return.

My Portfolio - Track your Portfolio and find out where your stocks/mutual funds stack up with the Zacks Rank.

Zacks #1 Rank Top Movers for Zacks #1 Rank Top Movers

Company Symbol Price %Chg
RPC INC RES 24.91 +8.35%
LITHIA MOTO… LAD 94.59 +4.60%
DELTA AIR L… DAL 39.15 +3.90%
FLAMEL TECH… FLML 14.51 +3.50%
SOUTHWEST A… LUV 28.87 +2.92%