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BofA in Settlement Talks with DoJ

Zacks Equity Research

Bank of America Corporation’s (BAC) legal woes continue with new settlement talks brewing between the bank and the U.S. Department of Justice (DoJ). The tentative settlement could cost BofA more than $13 billion. The news was first reported by Bloomberg.

It has been alleged that BofA, in an attempt to maximize profits, compromised on the quality of mortgage-backed loans sold in the pre-crisis period. The major portion of the faulty loans stems from BofA’s acquisitions of Countrywide Financial Corp. and Merrill Lynch & Co. in 2008. These loans defaulted, thereby resulting in huge losses for investors.

The aforementioned settlement talks are still in a nascent stage and the actual amount is yet to be decided. As per the Bloomberg report, sources, on grounds on anonymity, further added that the final settlement would shape in the next two months.

Earlier in March, BofA had announced a settlement with the Federal Housing Finance Agency (:FHFA), which is the conservator of government-sponsored enterprises (GSEs) Freddie Mac (FMCC) and Fannie Mae (FNMA), worth nearly $9.3 billion. The settlement resulted in pre-tax expenses of $3.6 in the first quarter.

Litigation expense and reserves for the same heavily weighed on BofA’s first-quarter results. The company reported a loss per share of 5 cents in the first quarter of 2014, which was significantly short of the Zacks Consensus Estimate of earnings of 5 cents. If BofA has to pay another hefty fine down the line, the chance of recovering from the first-quarter loss seems bleak.

Going forward, in the backdrop of tightening regulations, higher compliance costs would further increase BofA’s woes. However, on a positive note, the banking behemoth may return to profitability if its measures of improving the top line are able to counter the rising expenses.

Currently, BofA carries a Zacks Rank #5 (Strong Sell).

In the past, another banking major JPMorgan Chase & Co. (JPM) had entered in a similar settlement worth $13.0 billion for its alleged faulty mortgage practices in the pre-crisis period. However, it is worth noting that the total amount of compensation included a $4.0 billion fine related to an earlier settlement with FHFA.

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