Published October 24, 2012
Bank of America’s (BAC) legal headaches continue to mount as the U.S. filed suit against the banking giant on Wednesday, seeking more than $1 billion in damages for alleged mortgage fraud against Fannie Mae and Freddie Mac.
In court documents filed by the U.S. Attorney for the Southern District of New York, the U.S. alleges that a loan origination program in BofA's Countrywide Financial unit generated thousands of fraudulent and defective home loans that were sold to Freddie and Fannie. The loans later defaulted and caused massive losses and countless foreclosures.
Dubbed the “Hustle,” the program was “intentionally designed to process loans at high speed and without quality checkpoints,” the lawsuit said.
BofA continued the program after acquiring Countrywide in an ill-fated 2008 acquisition, the lawsuit said.
“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.”
The U.S. is requesting more than $1 billion in damages and civil penalties under the False Claims Act and a separate 1989 financial reform act.
The suit hints at frustration on the federal level over BofA’s decision not to buy back more of the toxic mortgages it sold to Fannie and Freddie.
“After the loans defaulted, Bank of America has resisted buying many of them back, despite the presence of fraud, misrepresentation and other obvious violations,” the U.S. said.
BofA didn’t respond to a request for comment, but a spokesman told Reuters that the claim it failed to repurchase loans from Fannie and Freddie is "simple false." BofA also said that at some point, it cannot be expected to compensate every entity that claims losses caused by the economic downturn.
According to the complaint, loan processors at Countrywide’s Full Spectrum Lending were “financially incentivized to put volume ahead of quality.” Further, the lawsuit said Countrywide’s initiated a one-time bonus to its quality control personnel to “rebut” defect rates found by corporate quality control.
“This lawsuit should send another clear message that reckless lending practices will not be tolerated,” said Bharara.
The latest lawsuit marks the first civil fraud suit brought by the Department of Justice related to mortgages sold to Fannie and Freddie, which were taken over by the government during the 2008 crisis.
Further, the lawsuit implies that BofA deserves some of the blame for the collapse of Fannie and Freddie.
Charlotte-based BofA has been saddled by countless lawsuits in the wake of the mortgage meltdown, including suits related to its poorly-timed acquisitions of Countrywide and Merrill Lynch.
Shares of BofA, the second-largest U.S. bank by assets, fell 0.53% to $9.31 on Wednesday.
Earlier this month Bharara’s office brought a separate lawsuit against Wells Fargo (WFC) that alleges the largest U.S. mortgage company recklessly issued mortgages that left the Federal Housing Administration with steep losses.