In the recent annual regulatory filing, Bank of America Corporation (BAC) revealed that it is faced with fresh investigation related to its faulty mortgage lending practices in the pre-crisis period. The civil division of the U.S. Attorney's Office for the Eastern District of New York in Brooklyn is probing into the matter.
It is alleged that BofA, as part of the Federal Housing Administration (FHA) program, had misused the powers bestowed upon it. The FHA program, formulated to benefit the lower income group, allowed banks like BofA to grant government insured loans to the targeted group without regulative scrutiny.
However, the loans had to meet certain criteria to be approved as government insured and it was the bank’s responsibility to look into the same. However, BofA, with the sole motive of maximizing profit, compromised on quality and released faulty loans in the market. These loans naturally defaulted, thereby resulting in huge losses for the government and eventually taxpayers.
Recently, JPMorgan Chase & Co. (JPM) agreed to pay $614 million to compensate the claims related to the FHA program. Further, other Wall Street biggies facing similar probe include Citigroup Inc. (C) and Deutsche Bank AG (DB).
BofA further revealed that the company’s activities in the foreign exchange market are also being investigated by regulative bodies across North America, Europe and Asia. In the pre-crisis period, traders of large banks and financial organizations often indulged in unfair rigging of benchmark interest rates to obtain better rates for their own orders, thereby causing upheaval in the global economy.
BofA has been facing litigations for quite some time and the company has maintained steady reserves considering the same. Now, with fresh probes being initiated, BofA raised its reserve to $6.1 billion from $5.1 billion in third-quarter 2013.
Despite large reserves kept aside to meet its legal expenses, BofA managed to deliver positive surprises in three out of the trailing four quarters with an average beat of 20.5%. Moreover, the initiatives on the company’s part to improve its balance sheet seem commendable.
As part of its latest endeavor to further improve its capital ratios, the company disclosed that it made some amendments in the agreement with Warren Buffett's Berkshire Hathaway Inc.
In 2011, Berkshire Hathaway acquired preferred stocks from BofA, and in return, infused capital in the company. As per international regulative rules, the large sum of $2.9 billion was exempted while calculating the company’s capital ratios.
However, with the latest amendments, the invested amount can be well utilized for calculation of Tier 1 capital, on condition that BofA will not redeem the preferred stock for the next five years. Further, while annual dividend was fixed at 6%, it was agreed that BofA was not required to pay extra in case it missed a dividend.
Currently, BofA carries a Zacks Rank #3 (Hold).
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