Bank of America (BofA), the largest US lender by deposits, has agreed to pay US government mortgage agency Fannie Mae $3.6bn ending their decade long dispute.
The bank has also agreed to buy back 30,000 mortgages for $6.75bn, and pay a further $1.3bn in compensation.
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Fannie Mae claims that BofA had sold it toxic home-loan debts between 2000 and 2008.
Prior to the 2008 financial crisis it became increasingly common for home loans to be grouped together and sold on as investments.
Brian Moynihan, CEO at BofA, said: "As we enter 2013, we sharpen our focus on serving our three customer groups and helping to move the economy forward."
"Together, these agreements are a significant step in resolving our remaining legacy mortgage issues, further streamlining and simplifying the company and reducing expenses over time."
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By GlobalDataThe settlement covers loans worth about $1.4tn, with outstanding balances of $300bn.
The US government sued BofA in October 2012 for alleged mortgage fraud, accusing subsidiary Countrywide Financial of selling thousands of toxic home loans to Fannie Mae and the government’s second mortgage agency Freddie Mac.
Earlier in October 2012, it took similar action against the banks Wells Fargo and JP Morgan Chase.
