Just in case you still respected or trusted Bank of America (NYSE: BAC) after learning that it reordered debit transactions in a manner that jacked up overdraft fees, the company has given you more reason to change your view. This case involves private investors that bought toxic mortgages that were sold as, well, not toxic.

In B of A's most recent quarterly Securities and Exchange Commission filing, the bank stated it reduced estimated losses it expects from mortgage repurchases by a whopping $4 billion. Its rationale: There are significant legal hurdles faced by private investors trying to access loan files and sue for damages. In other words, B of A plans to make it too difficult and/or too expensive for small investors to get what's only fair.

B of A has earmarked $7 billion to $10 billion to settle claims over its toxic mortgages. That's over and above the billions it already spent settling similar claims with Fannie Mae, Freddie Mac, Assured Guaranty (NYSE: AGO), and Ally Financial.

Not so fast ...
Thankfully, B of A's shameful plan may be easier said than done. Though the bank had hoped to fight mortgage repurchase demands loan by loan, recent court rulings allow parties suing banks over toxic mortgages to use a sampling of loans. That makes it easier and less expensive to sue. B of A itself has acknowledged that if this approach is upheld more generally, it could increase the number of private investors who sue to recover their losses.

Of course, if private buyers of B of A's toxic mortgages recover some of that $4 billion after all, that would reduce the bank's profits -- likely hurting stockholders.

Foolish takeaway
If you own bank stocks, there's earnings risk related to lawsuits over toxic mortgages (among other things). Bank of America may not have set aside enough assets to cover the cost of repurchasing toxic mortgages, which could cause a hit to earnings. Other banks with significant exposure to residential mortgages include Citigroup (NYSE: C), JPMorgan Chase (NYSE: JPM), Wells Fargo (NYSE: WFC), SunTrust Banks (NYSE: STI), and First Horizon National (NYSE: FHN)

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Fool contributor Cindy Johnson does not currently own shares of any stock in this story. No way. The Motley Fool owns shares of JPMorgan Chase and Wells Fargo. The Fool owns shares of and has opened a short position on Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.