Bank of America Corp.'s legal woes deepened Tuesday, as a big bank filed suit over soured home-loan bonds and a flurry of investors said they might object to a high-profile mortgage-bond settlement.

The news sent Bank of America shares down 3% on a day when most financial stocks were only modestly lower. The drop ended a relief rally that took root last week, after billionaire investor Warren Buffett's company took a $5 billion stake in the bank.

The lawsuit represents the latest blow for Bank of America, which has been pummeled by problems related to its 2008 acquisition of Countrywide Financial Corp. The deal left the Charlotte, N.C., lender saddled with hundreds of thousands of delinquent borrowers and exposed it to scores of requests from angry investors that it repurchase poorly performing mortgages that were packaged into securities.

The lawsuit filed on Tuesday by the U.S. Bank unit of U.S. Bancorp seeks to force Bank of America to repurchase all the loans in a $1.75 billion mortgage bond deal sold six years ago. U.S. Bank's suit, filed on behalf of bond investors, said Countrywide's loans "began to become delinquent and default at a startling rate" soon after they were sold.

The lawsuit, filed in New York State Supreme Court, alleges that there was a "systemic failure" by Countrywide to comply with underwriting guidelines and representations made to investors. The suit said the investors face "irreparable harm" if Bank of America doesn't repurchase the loans.

A spokesman for U.S. Bancorp said the bank "filed the lawsuit in its role as trustee for the bond deal at the direction of investors in the trust," but declined to comment further because of the pending litigation.

A Bank of America spokesman said that, while the bank is still reviewing the complaint, it doesn't believe "existing contractual documents give U.S. Bank any right to demand ... the repurchase [of] loans on a pool-wide basis, nor do we believe there is any basis in fact to demand a repurchase of every loan in this securitization, the majority of which have either paid off or are current."

Bank of America's chief executive, Brian Moynihan, has spent the past year trying to persuade investors that the bank is on the verge of putting the Countrywide problems behind it and won't need to raise more money to put its legal problems to rest. The bank's shares fell 27 cents Tuesday to close at $8.12, putting them down 39% for the year.

One high-profile attempt the bank has taken to resolve its mortgage troubles is in dispute. Bank of America in June agreed to pay $8.5 billion to settle claims brought by a group of high-profile investors, including money-manager BlackRock Inc. and insurer MetLife Inc., that lost money on soured Countrywide bonds for which Bank of New York Mellon Corp. was the trustee.

Attorneys general in New York and Delaware and dozens of bond investors, including hedge funds, banks, pension funds and insurers, have filed objections to the settlement, or in many cases have told the court they need more information to evaluate the proposed deal.

More than 20 filings were made on Tuesday as a flurry of investors, including the Federal Housing Finance Agency, the federal regulator overseeing the government-backed mortgage investors Fannie Mae and Freddie Mac, filed to intervene before the Aug. 30 deadline for investors covered by that settlement to file objections to the deal.

In its filing, the FHFA said it "considers it positive" that the proposed settlement includes changes in mortgage servicing and is "encouraged that a consortium of significant market participants supports" the deal.

The FHFA said in a statement that it "is aware of no basis upon which it would raise a substantive objection to the proposed settlement," but wants to retain its ability to obtain additional information and reserve its ability to voice an objection "in the unlikely event that necessity should arise."

In a separate filing, the National Credit Union Administration said it didn't have enough information to evaluate the proposed deal.

Last week, a group of bond investors identified only as Walnut Place acted to move the case moved to federal court from state court. Bank of New York Mellon (BK), acting on behalf of the bond trust, is expected to oppose that move.

David Grais, an attorney representing the Walnut Place investors, said the U.S. Bank action "is what every trustee should be doing. If Bank of New York Mellon had actually sued Bank of America, it could have achieved a far better settlement for investors," he said.

A spokesman for BNY Mellon declined to comment.

The settlement, which is a key part of Bank of America's attempt to put Countrywide's problems behind it, can't proceed until a court rules on the objections. Before that happens, a judge must decide which court will handle the case, which objectors will be allowed to intervene and the scope of discovery.

The bond deal at issue in the U.S. Bank lawsuit, HarborView Mortgage Loan Trust, Series 2005-10, originally had 4,484 loans. Forty-six percent of the 2,084 mortgages still in the pool have defaulted or were at least 60 days past due as of June 20, 2011, according to the lawsuit.

The deal was packaged by Greenwich Capital Financial Products, an affiliate of Royal Bank of Scotland Group PLC. The deal is one of a number involving Countrywide loans that isn't covered by the proposed settlement with bond investors and could be the subject of future actions, people familiar with the matter say. An RBS spokeswoman declined to comment.

The $8.5 billion investor settlement covers bond deals securitized by Countrywide, but not deals containing Countrywide mortgages that were packaged into securities by other firms. According to CoreLogic Inc., 442 other bond deals sold to private investors contain at least some Countrywide loans. Of those, 87 have more than 1,000 loans originated by Countrywide. Bank of America has previously said potential losses for claims by private investors could be as much as $5 billion.

In its lawsuit, U.S. Bank alleges that two-thirds of the 786 nonperforming loans reviewed at its direction "contains breaches of one or more" of representations made when loans were packaged into securities.

One borrower who took out a $737,250 loan in 2005 based on "stated" monthly income of $16,800 actually reported no income for that year, according to the lawsuit.

Another borrower, who took out a $642,000 stated income mortgage that year, claimed income of $15,000 per month as a sales manager at an architectural design firm, but actually earned $8,271 a month, the lawsuit said.

U.S. Bank said in court papers that it demanded that Bank of America buy back the troubled loans in accordance with its contractual obligations, but to date Bank of America "has failed to repurchase any loan put back to it ... and has offered no basis for its refusal."

Separately, a judge has dismissed two lawsuits against Bank of America over about $1.7 billion in notes held by BNP Paribas SA and Deutsche Bank AG. The notes were issued by Ocala Funding, a special-purpose entity that provided short-term liquidity funding to Taylor, Bean & Whitaker Mortgage Corp., which filed for bankruptcy protection in August 2009. Bank of America was the agent and trustee for the notes.

The two banks could sue again if they want, within the month.  

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