BofA Warns of More Legal Disputes as Potential Costs Rise

Bank of America Corp., the second-biggest U.S. lender, said the Department of Justice may file another suit tied to mortgage bonds and raised its estimate of possible added losses from legal and regulatory matters by 82 percent to $5.1 billion.

A U.S. Attorney’s office intends to recommend civil action against the Charlotte, North Carolina-based lender tied to the bundling of home loans into securities, the firm said yesterday in its quarterly regulatory filing. The bank also said its eventual legal costs could exceed even its revised estimates.

New lawsuits could hinder Chief Executive Officer Brian T. Moynihan’s effort to end fallout from the 2008 credit crisis and purchases of Countrywide Financial Corp. and Merrill Lynch & Co. The bank has already spent more than $45 billion on litigation, settlements and refunds for investors to compensate for shoddy mortgage lending, servicing and foreclosures.

“Two months ago I would’ve thought, before all this stuff hit with JPMorgan, that we were in the 8th inning of the mortgage aftermath,” said Nancy Bush, a bank analyst who founded NAB Research LLC in New Jersey. “It’s like the slate has been wiped clean, and we’re starting all over again.”

Bank of America’s $5.1 billion estimate of potential legal costs represents possible expenses beyond reserves at the end of the third quarter, and compares with $2.8 billion in the second quarter. The “current environment of heightened scrutiny” includes investigations and penalties that could hurt the bank’s reputation and trigger costs that exceed reserves and estimates of litigation costs, according to the filing.

Three Probes

The lender faced three more U.S. probes related to mortgage-backed debt after being sued in August over an $850 million bond, two people with direct knowledge of the situation said earlier this month.

The potential civil action disclosed yesterday is from one of those investigations, which are from U.S. attorneys offices in Georgia, California and New Jersey and involved either Countrywide or Merrill Lynch, said a person with direct knowledge of the situation.

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Lenders are under pressure to re-evaluate potential legal costs after JPMorgan Chase & Co., the biggest U.S. bank by assets, entered talks with the Justice Department on a proposed $13 billion settlement of state and federal probes. The deal hit a snag this week as the Justice Department told JPMorgan it wouldn’t accept language submitted Oct. 27, two people familiar with the situation said.

Part of JPMorgan’s deal was finished with the Federal Housing Finance Agency last week, as the New York-based bank agreed to pay $4 billion to settle claims it sold faulty mortgage bonds to Fannie Mae and Freddie Mac.

High Bar

Bank of America may have to pay $5 billion to $8 billion to settle the FHFA’s suit against it after JPMorgan’s deal set “a relatively high bar,” Fitch Ratings said this week. Bank of America had about $57 billion of mortgage-backed securities cited by the FHFA lawsuit, compared with about $33 billion in the JPMorgan case, Fitch said.

Mortgage lenders have faced demands for refunds from private investors and government-backed mortgage buyers such as Fannie Mae and Freddie Mac who claim the banks used lax standards to create loans that later soured.

Bank of America is being scrutinized for violations of the Financial Institution Reform, Recovery and Enforcement Act of 1989, or FIRREA, people with knowledge of the plans said this month. The Justice Department cited that statute in the August lawsuit, which the company had flagged to investors in an earlier regulatory filing.

Jerry Dubrowski, a company spokesman, declined to comment beyond the filing.

To contact the reporter on this story: Hugh Son in New York at hson1@bloomberg.net

To contact the editors responsible for this story: Christine Harper at charper@bloomberg.net; David Scheer at dscheer@bloomberg.net

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