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BofA Fined $1.3B for 'Hustle' Fraud, May Appeal

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Litigation, settlements and investigations pertaining to Bank of America Corporation’s (BAC) past business conducts continue to make headlines. This time BofA makes news for the settlement associated with the sale of risky residential mortgage-backed securities (RMBS) by Countrywide Financial Corp. (acquired in 2008), for which the bank has been ordered to pay $1.27 billion.

The fine was levied by the U.S. District Judge Jed Rakoff in Manhattan, after a jury held BofA accountable to pay penalty for selling defective loans to Fannie Mae (FNMA) and Freddie Mac (FMCC) from Aug 2007–May 2008 via Countrywide. The company was accused of selling loans underlying these RMBS without properly assessing the creditworthiness of borrowers.

The Federal prosecutors indicted Countrywide for creating the program 'high-speed swim lane' (:HSSL) or 'Hustle,' which rewarded employees for the quantity rather than quality of loans. These loans, worth nearly $2.96 billion, were then bundled and sold off to Fannie Mae and Freddie Mac.

BofA, according to its spokesperson, is considering legal options and may appeal against the ruling.

Additionally, a former Countrywide executive, Rebecca Mairone was found guilty of civil fraud. Mairone has been ordered to pay $1 million for allegedly playing a lead role in the above-mentioned program.

Separately according to close sources, BofA’s negotiations with the Justice Department (:DOJ) have eventually advanced, after the bank increased the settlement amount to nearly $14 billion, including $7 billion as cash penalty. Earlier in Jun 2014, the talks had reached an impasse over differences in the settlement sum.

On the other hand, the DOJ has already cleared similar charges with Citigroup Inc. and JPMorgan Chase & Co. (JPM). While Citigroup agreed to pay $7 billion, JPMorgan settled for $13 billion.

We believe that though BofA has been able to settle quite a few cases pertaining to Countrywide, it still faces a considerable number of litigation issues that could weigh on its financials going forward. The company continues to suffer from Countrywide’s flawed business conduct in the pre-crisis period. Till date, BofA has incurred more than $40 billion in losses from bad loans, RMBS claims and lawsuits.

Currently, BofA carries a Zacks Rank #3 (Buy).

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