Manhattan U.S. Attorney Files Billion Dollar Lawsuit Against Bank of America, Citing “Brazen” Mortgage Fraud

On October 24^th, the United States Attorney for the Southern District of New York, Preet Bharara, along with the Inspector General of the Federal Housing Finance Agency and the Special Inspector General for the Troubled Asset Relief Program (TARP), announced a civil mortgage fraud lawsuit against Bank of America Corporation and Countrywide Home Loans, Inc., seeking punitive and treble damages under the False Claims Act, 31 U.S.C. §3729.

The complaint alleges a systematic lack of oversight in the loan origination process, known as the High Speed Swim Lane, which led to defaults and foreclosures resulting in over a billion dollars in losses for the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac. The High Speed Swim Lane (“the Hustle”) process originated at Countrywide in 2007 in the face of tightening loan purchase requirements by the GSEs, and was continued under Bank of America after its acquisition of Countrywide a year later.

Intended to process loans at “high speed and high volume,” the Hustle removed many traditional safeguards and pushed through loans with significant default potential. Removing these safeguards allegedly included eliminating compliance officers, doing away with mandatory underwriting checklists, and entrusting loan processors (who previously were considered so incompetent they were not allowed to answer borrower questions) with duties previously performed by underwriters. As long as the company’s automated underwriting system approved the potential loan’s risk, underwriters never even saw the loan.

Compounding the potential for fraud, employees inputting these loans were compensated “solely based on the quantity of loans originated”. The result? At one point, nearly 40% of the loans processed under the Hustle allegedly had “material defects,” or about ten times the usual rate. In fact, Countrywide’s willingness to extend “stated income” mortgages without careful quality control led to default rates on these loans exceeding 70%, per a January 2008 internal review.

Despite executives’ direct knowledge of these figures, the Government claims Countrywide—and later Bank of America—ignored warnings and continued to sell these risky and defective loans to Fannie Mae and Freddie Mac in large numbers, while falsely claiming the company had tightened its underwriting guidelines. In the automated underwriting system, employees—incentivized by their pay structure and pressure from upper management—allegedly would repeatedly tweak inputs until the system accepted the proposed mortgages, even if it required completely falsifying income or home value figures.

When the loans predictably defaulted, the company refused to purchase the loans back from the GSEs or reimburse them for their losses, insisting that the clearly fraudulent loans were proper. The losses incurred affected several federally insured financial institutions who had invested in the GSEs, and required treasury funds to reimburse the losses of the GSEs and ensure they could meet their obligations to third parties. Institutions with large holdings in Fannie Mae and Freddie Mac were hit especially hard. One such institution, FBOP Corporation, suffered substantial losses due to its preferred stock holdings in the GSEs and was forced to close in 2009.

The Government is pursuing claims under the False Claims Act for the material misrepresentations to the GSEs that Bank of America and Countrywide made, knowingly or with reckless disregard of the truth, which directly influenced the decisions of GSEs to purchase mortgages from the companies; prosecutors are seeking the maximum penalties for each charge, which total over one billion dollars.

This lawsuit follows the settlement of civil fraud suits against CitiMortgage, Inc., Flagstar Bank, F.S.B., Deutsche Bank, and MortgageIt, and joins the current actions pending against Wells Fargo, N.A., and Allied Home Mortgage Capital Corp.