U.S. District Judge Jed Rakoff in Manhattan is ordering Countrywide, a Bank of America (BAC) unit, to pay $1.3 billion in penalties for faulty mortgage loans that it sold to Freddie Mac (FMCC) and Fannie Mae (FNMA) leading up to the 2008 financial meltdown. This was the first mortgage fraud lawsuit that the federal government brought to go to trial.
The penalty is much less than the $2.1 billion maximum that the government had asked for. The government’s mortgage lawsuit against Countrywide originated from a whistleblower case brought against Bank of America by Edward O’Donnell, an ex-Countrywide executive.
Rakoff determined that Freddie and Fannie paid close to $3 billion for High Speed Swim Lane loans. This, after a jury determined last year Countrywide and Rebecca Mairone, one of its ex-executives, were liable for selling thousands of defective loans to the government-sponsored enterprises. Mairone’s penalty is $1 million.
During the trial, the government argued that Countrywide misrepresented risky loans it processed through the HSSL program, also known as “Hustle,” as being investment quality when in fact they bad loans were issued. The misrepresentations took place in 2007 and 2008. Loans were purportedly handled swiftly, and quality was not a priority.
The HSSL program tied bonuses to how rapidly bankers could originate the loans. Federal prosecutors said that this caused Countrywide to bring in loan processors who lacked the proper qualifications and experience and break down internal controls that should have weeded out high risk borrowers.
Rakoff called the fraud by the defendants “brazen,” driven by “profits,” and having no regard for the harm inflicted that was inflicted on others. He wrote that even though there were reports internally at Countrywide indicating that the quality of the loans were deteriorating, and employees were vocal about concerns, the lender proceeded to put even more pressure on loan specialties to disregard their worries.
Rakoff said he decided on the bank’s penalty according to how much Freddie and Fannie paid for the mortgages that were proven defective—about 42% of over 17,600 loans. Bank of America has until September 2 to pay. It had argued that it shouldn’t have to pay the penalties, or at least no more than $1.1 million under the Financial Institutions Reform, Recovery and Enforcement Act. Meantime, Mairone will pay her penalty in installments.
Meantime, the impasse between the bank and the U.S. Justice Department over the latter’s mortgage securities investigation remains. The two parties are at odds over whether Bank of America should pay a penalty for alleged wrongdoing by Merrill Lynch & Co. Inc. and Countrywide before the bank owned both. The amount Bank of America is expected to pay to resolve the probe is at least $13 billion. The monies are expected to consist of cash and consumer relief.
Bank of America’s Countrywide Ordered to Pay $1.3 Billion, Bloomberg, July 30, 2014
Judge Orders Bank of America to Pay $1.27 Billion in ‘Hustle’ Case, The Wall Street Journal, July 30, 2014
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