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Will BofA Get Respite from Mortgage Suit?

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A day after Bank of America Corporation (BAC - Free Report) declared a $9.3 billion mortgage settlement deal with the Federal Housing Finance Agency (FHFA), there is something that the bank’s investors can look forward to. The U.S. Magistrate Judge, David Cayer has hinted at the dismissal of a similar case due to lack of proper evidence.

The case, filed by the Department of Justice (DOJ) in Aug 2013, is related to BofA’s sale of residential mortgage-backed securities (RMBS) worth $850 million. The company was accused of misrepresenting the risks and hiding information related to the underlying securitization named BOAMS 2008-A.

Further, it was alleged that more than 40% of the 1191 loans in the RMBS did not fulfill BofA’s own underwriting standards. The company was also charged for not conducting proper loan-level diligence on the mortgages that were used as collateral.

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

The case against BofA was filed under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA). Notably, this Act demands less evidence and offers prosecutors a 10-year statute of limitations to file a case.

Following the hints of dismissal of the case, the DOJ filed court papers stating that it will be objecting to it before a district court judge. At present, U.S. District Judge, Max Cogburn will be reviewing Cayer's recommendation.

In similar cases filed under FIRREA, in Feb 2013, Standard & Poor's Ratings Services (S&P) – a unit of McGraw Hill Financial, Inc. – was sued by the DOJ for allegedly raising its credit ratings on risky RMBS before the financial crisis. Earlier, in 2011, The Bank of New York Mellon Corporation (BK - Free Report) was accused by Manhattan U.S. Attorney of defrauding its custodial customers who used its foreign exchange services.

If the above-mentioned case is actually is dismissed, it will be a major setback for law enforcement agencies. These agencies have been striving hard to pursue litigations against banks and other financial institutions and to make them pay for their flawed business conduct that led to the financial crisis in 2008.

However, for BofA, this dismissal (if approved) will come as a respite. Notably, the company still faces several litigations related to RMBS. These could drag the company’s earnings through increased legal expenses. The $9.3 billion case settled earlier this week will likely lower the company’s first-quarter 2014 earning per share by 21 cents.

Currently, BofA carries a Zacks Rank #4 (Sell).

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