The Southern District U.S. Attorney’s Office yesterday announced a civil mortgage fraud lawsuit against Bank of America Corp., accusing the company of defrauding government-backed Fannie Mae and Freddie Mac of more than $1 billion.
The complaint, unsealed in Manhattan federal court, accused Bank of America and Countrywide Financial Corp. of a “spectacularly brazen” scheme. According to the complaint, the so-called “Hustle” began in 2007, before the purchase of Countrywide in 2008 but continued through 2009.
As a result, prosecutors charge, Fannie Mae and Freddie Mac bought thousands of defective residential mortgage loans that eventually defaulted.
“Countrywide and Bank of America systematically removed every check in favor of its own balance—they cast aside underwriters, eliminated quality controls, incentivized unqualified personnel to cut corners, and concealed the resulting defects,” U.S. Attorney Preet Bharara said in a statement. “These toxic products were then sold to the government sponsored enterprises as good loans.”
A Bank of America spokesman could not immediately be reached for comment.
The faulty mortgages sold to Fannie Mae and Freddie Mac were originated through a process called “Hustle,” shorthand for “High Speed Swim Lane.” It operated under the motto, “Loans Move Forward, Never Backward.”
Employees involved in the process would routinely falsify information in loan applications so they could be quickly approved—for example, by simply making the potential borrower’s stated income or value of the underlying property higher than it actually was, the government charged.
For example, the suit said that loan processors no longer had to complete worksheets that helped them assess whether income levels that borrowers entered on their loan applications were reasonable.
If processors entered a borrower’s information into a computerized underwriting program and the program raised flags, employees were encouraged to change the numbers, the suit said.
It also said that bonuses were awarded based solely on the number of loans an employee could generate, not on their quality.
The lawsuit gives seven examples of mortgages made for homes in California, Alabama, Florida and Georgia in which the borrowers’ income and other qualifications were falsified.
Prosecutors claimed that mortgages sold through the program that later defaulted contributed to Fannie Mae and Freddie Mac’s “massive losses” during the financial crisis. In 2008, Fannie Mae and Freddie Mac were placed in conservatorship under the Federal Housing Finance Agency.
Countrywide and Bank of America were the largest providers of residential mortgages to Fannie Mae and Freddie Mac, which, according to prosecutors, did not do its own pre-purchase loan review, relying on lenders’ representations.
The lawsuit is seeking civil damages under the Financial Institutions Reform, Recovery, and Enforcement Act and treble damages under the False Claims Act for the alleged $1 billion in damages suffered by Fannie Mae and Freddie Mac as a result of the defective mortgages.
The case was originally filed under seal in February. Southern District Judge Jed Rakoff ordered it unsealed yesterday.
Bharara noted that this case marked the sixth time in 18 months that his office had sued a major financial institution for allegedly “reckless mortgage practices” leading up to the financial meltdown. It was the first such lawsuit involving Freddie Mac and Fannie Mae.
In those 18 months, Bharara’s office has settled lawsuits against CitiMortgage, Flagstar Bank and Deutsche Bank over mortgages. Lawsuits against Wells Fargo and Allied Home Mortgage are pending.
Separately, Bank of America, along with JPMorgan Chase and Wells Fargo Bank, was sued in February by New York Attorney General Eric Schneiderman over its use of the Mortgage Electronic Registration System, or MERS.
The suit, part of which has settled, alleges the banks use MERS, a digital mortgage tracking service, as a “shell company” to act as mortgagee for the mortgages they issue. The suit claims the practice has shortchanged localities of about $2 billion in fees and led to “foreclosure proceedings en masse based on deceptive and fraudulent court submissions, seeking to take homes away from people with little regard for basic legal requirements or the rule of law” (NYLJ, Feb. 6).
Bank of America is also one of five mortgage issuers that have collectively agreed to pay $25 billion to resolve a nationwide federal probe into deceptive mortgage lending practices (NYLJ, Feb. 10). The other lenders in that settlement are JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial.
In the Southern District case, Brendan Sullivan Jr. of Williams & Connolly is representing Bank of America and Richard Strassberg of Goodwin Procter is counsel for Countrywide Financial. Both Sullivan and Strassberg declined to comment.
@|Brendan Pierson can be contacted at firstname.lastname@example.org. Zoe Tillman, a reporter at The National Law Journal, an affiliate, can be contacted at email@example.com. The Associated Press contributed to this report.