The drama continues to unwind at Montgomery, Ala.-based Colonial BancGroup (CNB) after an investigation of its warehouse lending division last week. Charlotte, N.C.-based Bank of America (BAC) is suing Colonial for more than $1bn in cash and loans, according to industry reports. BofA alleges Colonial is holding the cash and loans as a custodian for commercial-paper vehicle Ocala Funding, which receives funding from Colonial. Ocala Funding is backed by Taylor, Bean and Whitaker (TBW), which faces its own troubles after the Federal Housing Administration (FHA) suspended its operations last week. The commercial paper in question is backed by residential mortgages, some of which were sold to Freddie Mac (FRE). BofA serves as the representative for holders of Ocala Funding debt. When Colonial received cash from Freddie for the mortgage sale, it was supposed to pass that on to Ocala Funding. BofA alleges that never happened, according to a Birmingham News report. Federal agents executed search warrants on behalf of the Special Inspector General for TARP, probing Colonial’s warehouse mortgage lending facility last week as part of a fraud investigation allegedly involving funds from the Troubled Asset Relief Program (TARP). a Colonial representative said it was the bank’s policy to not comment on pending litigation. A BofA representative said the bank had no comment. Write to Austin Kilgore.

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