Bank of America Corp (NYSE:BAC) could face additional litigation and / or monetary negotiations as the recent court order doesn’t release loan modification claims.

Bank Of America BAC
Bank of America

Moshe Orenbuch and Jill Glaser Shea of Credit Suisse point out that they remain on the sidelines on Bank of America Corp (NYSE:BAC) shares and assigned a Neutral rating to the stock.

Bank of America’s recent settlement

Last week, Bank of America Corp (NYSE:BAC) received court approval for its $8.5 billion agreement to settle the majority of the complaints filed by almost two dozen mortgage securities investors.

Justice Barbara R. Kapnick of the State Supreme Court in Manhattan emphasized in the 53-page decision that the bank’s settlement was reached in good faith. The Bank of America New York Mellon Corporation was the trustee.

However, the judge made an exception regarding the claims of investor’s related loan modifications. According to her, investor’s claims could stand because Bank of America Corp (NYSE:BAC) settled the claims without evaluating their potential worth or strength.

Carve-out for loan modifications provides less finality

The Credit Suisse analysts point out that though it is a positive for Bank of America that the $8.5 billion settlement was approved, the carve-out for loan modifications provides less finality to this issue than anticipated by the analysts.

The analysts believe there could be some level of potential liability on $31 billion of modified loans, though it is too early to assess the size of any potential liability.

Drawing attention to the judge’s remarks: “Trustee acted unreasonably or beyond the bounds of reasonable judgment,… in exercising its power to settle the loan modification claims without investigating their potential worth or strength.” The Credit Suisse analysts anticipate that there could be additional litigation and / or monetary negotiations to settle potential claims on this subset of loans, which could ultimately cost Bank of America an amount beyond the $8.5 billion.

Analysts assign Neutral rating

The Credit Suisse analysts note Bank of America Corp (NYSE:BAC) has made good progress on mortgage-related issues, although the process of settling these claims is complex, remains protracted and fraught with uncertainty. With the recent court approval doesn’t provide complete finality and with other legal issues remaining, including the FHFA lawsuit and DOJ fraud claims, the Credit Suisse analysts remain on the sidelines on the shares for now as they anticipate some additional lumpiness in potential legal charges.