Another Nagging Headache for Bank of America

Hot on the heels of a $15 million Consumer Financial Protection Bureau settlement with mortgage insurers Genworth Financial , MGIC Investment , Radian Group , and United Guaranty, a subsidiary of AIG , over kickbacks paid to banks for mortgage insurance, comes some bad news in the same vein -- this time, for Bank of America .

Insurance and reinsurance
Even as the above insurers are forking over settlement checks to the CFPB, the bureau is investigating further the whole sordid mess that prompted the settlement in the first place. Now, it is turning its gaze to the recipients of those bribes: mortgage lenders like B of A.

But, that is a future concern. Right now, Bank of America will be forced to deal with homeowners who filed suit against the bank last year, claiming just the type of kickback scheme for which the insurers ponied up. B of A tried to get the claims dismissed, but a judge decided a little over a week ago that the bank will have to face those charges.

The homeowners took out mortgages from Bank of America between 2005 and 2007, and allege that the bribes drove up costs for all borrowers, to the tune of nearly $285 million over a seven-year period. Not surprisingly, Radian, Genworth, and United Guaranty are also named in the suit.

Purportedly, the scheme worked like this: Because mortgage loans with less than a 20% down payment require mortgage insurance in case of default, the large insurers sought to gain more business for themselves by bribing the lenders. In addition, mortgage lenders set up reinsurance entities that were utilized by the insurance companies to channel bribery money to the lenders in exchange for additional business -- since it is the lender, not the borrower, that picks the insurance carrier.

Other banks were involved, too
Bank of America was by no means the only lender to possibly engage in this behavior. Last February, Wells Fargo learned that a complaint against itself and QBE Insurance had been given class action status in Florida, while two months later, Fifth Third Bank was sued by homeowners alleging that Fifth Third engaged in the same type of conduct, setting up a reinsurance company through which insurance money was funneled.

Both JPMorgan Chase and Citigroup have come under scrutiny by the state of New York in recent months, as well.

Misery may love company, but for Bank of America, more bad news on the legal front is always unwelcome given its vast stable of pending lawsuits. Though the current claim of damages here is not onerous, it is one more reminder that we have yet to see the end of B of A's legal woes.

Bank of America's stock doubled in 2012, yet the lawsuits keep coming, wearing investors' patience thin and threatening future gains. With significant challenges still ahead, it's critical to have a solid understanding of this megabank before adding it to your portfolio. In The Motley Fool's premium research report on B of A, analysts Anand Chokkavelu, CFA, and Matt Koppenheffer, Financials bureau chief, lift the veil on the bank's operations, including detailing three reasons to buy and three reasons to sell. Click here now to claim your copy.

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