The US filed a fraud lawsuit against Bank of America Corp, accusing it of causing taxpayers more than US$1 billion of losses by selling thousands of toxic mortgage loans to Fannie Mae and Freddie Mac.
Wednesday’s case, originally brought by a whistleblower, is the US Department of Justice’s first civil fraud lawsuit over mortgage loans sold to the big mortgage financiers, bailed out in 2008.
It also compounds the legal problems that Bank of America chief executive Brian Moynihan faces over the second-largest US bank’s disastrous July 2008 purchase of Countrywide Financial Corp, once the nation’s largest mortgage lender.
According to a complaint filed in Manhattan federal court, Countrywide in 2007 invented and Bank of America continued a scheme known as the “Hustle” to speed up processing of residential home loans.
The program, also known as HSSL for “High Speed Swim Lane,” operated under the motto “Loans Move Forward, Never Backward,” and tried to eliminate “toll gates” designed to ensure that loans were sound and not tainted by fraud, the government said.
The program removed underwriters from all but the riskiest loans and replaced them with loan specialists, previously considered unqualified even to answer borrower questions.
This led to “defect rates” approaching 40 percent, roughly nine times the industry norm, but Countrywide concealed this from Fannie Mae and Freddie Mac, and even awarded bonuses to staff to “rebut” the problems being found, the government added.
Defaults and foreclosures soared, yet the bank has resisted buying back many of the defaulted loans from the scheme, which ran through 2009, the government said.
“The fraudulent conduct alleged in today’s complaint was spectacularly brazen in scope,” US Attorney Preet Bharara said in Manhattan. “Countrywide and Bank of America made disastrously bad loans and stuck taxpayers with the bill.”
FALSE CLAIMS ACT
Wednesday’s lawsuit seeks civil fines, as well as triple damages under the federal False Claims Act, which the government has used several times in recent years against Wall Street.
Lawrence Grayson, a bank spokesman, said in response to the lawsuit: “Bank of America has stepped up and acted responsibly to resolve legacy mortgage matters.”
“The claim that we have failed to repurchase loans from Fannie Mae is simply false. At some point, Bank of America can’t be expected to compensate every entity that claims losses that actually were caused by the economic downturn,” he said.
In February, Bank of America agreed to a US$1 billion settlement of False Claims Act allegations over home loans submitted for insurance by the Federal Housing Administration, in a case from the US Attorney’s office in Brooklyn, New York.
Since Moynihan’s predecessor, Kenneth Lewis, paid US$2.5 billion for Countrywide, the Charlotte, North Carolina-based bank has lost nearly US$40 billion on mortgage litigation and investor demands to buy back soured loans, Credit Suisse said on Oct. 5.
Some of these costs related to Merrill Lynch & Co, which Lewis bought at the beginning of 2009. Last month, Bank of America agreed to pay US$2.4 billion to settle a lawsuit accusing it of misleading investors about that takeover.