Bank of America Corp (BAC): Yet Another Nagging Headache for The Bank

Hot on the heels of a $15 million Consumer Financial Protection Bureau settlement with mortgage insurers Genworth Financial Inc (NYSE:GNW), MGIC Investment Corp. (NYSE:MTG), Radian Group Inc (NYSE:RDN), and United Guaranty, a subsidiary of American International Group Inc (NYSE:AIG), over kickbacks paid to banks for mortgage insurance, comes some bad news in the same vein — this time, for Bank of America Corp (NYSE:BAC).

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.

Bank of America Corp (NYSE:BAC)But, that is a future concern. Right now, Bank of America Corp (NYSE:BAC) 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.