Bank of America Corp. (BAC) told Fannie Mae it refuses to cooperate with the U.S. mortgage firm’s new stance on loan buybacks, setting the lender up for a potential surge in claims and penalties.

The bank is disputing Fannie Mae’s demand that lenders repurchase mortgages or cover any losses themselves if an insurer drops coverage, Bank of America said this month in a regulatory filing. The lender, ranked second by assets among U.S. banks, said it “does not intend to repurchase loans” under what it deems to be new rules, and the refusal may trigger penalties or other sanctions.

At stake is Bank of America’s ability to contain costs from faulty mortgages, which have reached about $40 billion for refunds, lawsuits and foreclosures. The company set aside $278 million for loan buybacks in the third quarter, the least since Chief Executive Officer Brian T. Moynihan took over almost two years ago. Those expenses may rebound if Fannie Mae’s rules stand, the bank said.

Fannie Mae didn’t enforce this policy before because “it was a different economic time,” said David Felt, a former deputy general counsel at the Federal Housing Finance Agency, the regulator for Fannie Mae. Defaults were fewer and the firm didn’t want to harm relations with lenders by being too picky, he said. “They’d overlook the small things. Well, they’re no longer small things, and they’re no longer the old Fannie Mae.”

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