Already saddled with mounting regulatory scrutiny, Bank of America Corp. (BAC) may see what looked like a closed case reopened as an objection filed by the U.S. government could derail a proposed $500 million settlement the lender struck earlier this year over allegedly defective mortgages.
Late Monday night, the Federal Deposit Insurance Corporation filed an objection against the settlement Bank of America announced in April regarding allegations it sold billions of dollars of mortgage-backed securities backed with defective loans originated by mortgage-lender Countrywide, which it purchased in 2008. The plaintiffs said that by late 2008, virtually all of those certificates were downgraded to junk bond status.
Countrywide had been sued by several pension funds involved in the case way back in November 2007. Other pension firms were later added to the case, including the Maine State Retirement System in January 2010.
Bank of America had said that the settlement--which was subject to court approval--would resolve 80% of all the claims filed against Countrywide mortgage-backed securities alleging securities disclosure issues, and 70% of the claims filed against Bank of America-created loans on that issue.
The FDIC is objecting to the settlement on the grounds that the subset of plaintiffs it was negotiated by "had a conflict of interest in negotiating and accepting the proposed settlement because, under the settlement, they would receive substantial payments at the expense of the rest of the class."
The plaintiffs' lead counsel, Steven J. Toll of Cohen Milstein Sellers & Toll PLLC, didn't immediately respond to a request for comment.
Separately, the FDIC noted that by ruling that the negotiating parties don't represent the interests of the plaintiffs overall, the court took away their ability to represent the plaintiffs and hence to be able to use the threat of litigation to press for a better offer.
The FDIC also said the court should reject the offer because the "amount of the proposed settlement as a percentage of the value of the securities that it covers, is only one tenth the amount of the average class action settlement in residential mortgage-backed security cases."
Bank of America didn't immediately respond to a request for comment.
For years, the Charlotte, N.C., bank, one of the nation's largest by assets, has been dogged by the aftermath of the mortgage meltdown, mainly losses from soured loans and legal claims from mortgages it originated and sold.
Bank of America is currently being sued by the federal government which says its Countrywide unit misled executives at Fannie Mae and Freddie Mac about the quality of loans they bought in 2007 and 2008.
Write to Saabira Chaudhuri at email@example.com
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(END) Dow Jones Newswires
October 08, 2013 12:05 ET (16:05 GMT)Copyright (c) 2013 Dow Jones & Company, Inc.
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