May 2020 update; US Bank submits proposed order shielding discovery from public inspection.
US Bank sues BofA for mortgage-related breach of contract
U.S. Bancorp (NYSE: USB) is suing Bank of America Corp. (NYSE: BAC) for what it claims is a breach of contract related to mortgage-backed securities. U.S. Bank filed the suit on Friday in U.S. District Court for the Southern District of New York.
The complaint involves First Franklin Financial Corp., which was acquired by Merrill Lynch & Co. Inc. in 2006. BofA then acquired Merrill Lynch in 2008. According to court documents, First Franklin sold defective mortgages to a residential mortgage-backed securities trust in 2007, but failed to inform U.S. Bank, who is acting as trustee.
Securitization is when an institution pools certain assets and then issues securities backed by those assets. This particular trust was comprised of about 9,300 mortgage loans with a $1.9 billion principal balance, according to court documents.
The original agreement required that First Franklin repurchase mortgages if they were found to be defective. U.S. Bank informed Bank of America Merrill Lynch that thousands of the loans were defective between 2012 and 2014. Merrill Lynch repurchased some of those loans, but “the overwhelming majority of the Defective Loans have been neither cured nor repurchased,” the lawsuit states.
The complaint also alleges that First Franklin knew the loans were defective when the trust was formed.
U.S. Bank is seeking compensation for the defective loans, either through repurchases or other means. The bank is also requesting damages for BofA’s alleged breach of contract.
BofA received a summons on Tuesday. It has three weeks to file a response.
Charlotte-based BofA and Minneapolis-based U.S. Bank declined to comment on the matter.
This particular suit stems from First Franklin’s, Merrill Lynch’s and BofA’s questionable practices leading up the financial crisis. BofA and its banking peers were blamed for playing a large role in causing that crisis. They have faced multiple lawsuits since then.