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FHFA Suit Against BofA Merrill May Proceed


A lawsuit that charges Bank of America Merrill Lynch with misleading mortgage investors will be permitted to proceed, a federal judge in Manhattan has ruled.

The decision means that the company must now prepare to go to trial to defend itself against allegations by the Federal Housing Finance Agency (FHFA) of wrongdoing in its sale of securities backed by residential mortgages. The ruling was made by Denise Cote, a U.S. District Judge for the Southern District of New York.

The ruling follows a decision Monday by Cote that FHFA may proceed with a lawsuit that accuses JPMorgan Chase of misleading mortgage investors.

The lawsuits against both Merrill and JPMorgan are among 16 actions the FHFA has brought in Manhattan involving charges of misconduct by underwriters of securities backed by residential mortgage loans. The allegations involve the offering and sale of securities purchased by Fannie Mae and Freddie Mac over a roughly two-year period beginning in 2005. FHFA filed the lawsuits last December as part of its role as conservator for Fannie and Freddie.

The FHFA alleges that Merrill and other defendants made false representations to the effect that the underlying mortgages complied with certain underwriting guidelines and standards. The suit against Merrill concerns 88 mortgage-backed securities certificates that corresponded to 72 securitizations by Merrill.

In its motion to dismiss the case, Merrill, like JPMorgan, claimed that the FHFA had failed to support claims that the loans underlying the securitizations departed from the guidelines described in offering documents.

Cote winnowed down the FHFA’s claims against Merrill, but also stated in her opinion that “the facts alleged in the amended complaint are sufficient to plead fraud with respect to the offering materials’ representations regarding mortgage underwriting standards.”

The judge also rejected Merrill’s contentions that a District of Columbia law required the FHFA to specifically demonstrate that Fannie and Freddie relied on the underwriter’s claims. Merrill also argued that the FHFA had forfeited its right to recover the amounts Fannie and Freddie paid for the securities because the statute of limitations had expired before the FHFA filed is lawsuit and that agency cannot seek punitive damages.

A BofA spokesman declined to comment on the ruling, which was first reported by Reuters.

The court said it expects depositions in the case to take place next year in anticipation of a trial in June 2014.


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