Federal prosecutors in Manhattan sued Bank of America for $1 billion on Wednesday, alleging the bank defrauded government-sponsored mortgage giants Fannie Mae and Freddie Mac.
The lawsuit is the latest legal mire for the Charlotte-based bank, which has already agreed to pay billions of dollars to resolve other lawsuits.
U.S. Attorney Preet Bharara said in the complaint that Countrywide, which was purchased by the bank, generated thousands of fraudulent home loans through a process known as the “Hustle,” which involved processing home loans at high speed and without quality checkpoints. And the lawsuit contends that the “Hustle,” or HSSL (which stood for “High Speed Swim Lane”), continued after Bank of America completed the Countrywide acquisition.
The loans were sold to Fannie Mae and Freddie Mac and later defaulted at a far higher rate than normal, causing more than $1 billion in losses and numerous foreclosures, the U.S. attorney’s office said in a statement. Countrywide was the largest mortgage lender in the U.S. before the financial crisis.
“The fraudulent conduct alleged in today’s complaint was spectacularly brazen in scope,” Bharara wrote. “Countrywide and Bank of America made disastrously bad loans and stuck taxpayers with the bill.”
This is the sixth such suit the government has brought against banks. Bharara announced Oct. 9 that the government has sued Wells Fargo, alleging that the bank failed to follow underwriting rules on thousands of government-insured loans.
Bank of America didn’t immediately return a phone call seeking comment.
Bharara says Wednesday’s case against Bank of America is the first civil fraud suit brought by the Justice Department concerning mortgage loans later sold to Fannie and Freddie.
“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,” Bharara said. “These toxic products were then sold to the government sponsored enterprises as good loans.”
Bharara said the Hustle program began under Countrywide in 2007 and continued after Bank of America bought the tottering lender in 2008. “After the merger, the Hustle continued unabated through 2009,” Bharara said in a statement.
Countrywide, a major subprime lender, initiated the “Hustle” in August 2007 to make up for lost revenue after the subprime market started melting down in 2007, the lawsuit said. The Hustle involved lowering lending standards and removing quality checks in order to generate loans more quickly, according to the lawsuit.
“According to internal Countrywide documents, the aim of the “Hustle”...was to have loans “move forward, never backward,” the lawsuit said. “Countrywide eliminated every significant checkpoint on loan quality and compensated its employees solely based on the volume of loans originated, leading to rampant instances of fraud.”
To speed up loan originiation, Countrywide removed underwriter review even from high-risk loans, and assigned underwriting jobs to “loan processors who were previously considered unqualified even to answer borrower questions,” the lawsuit said. Countrywide also eliminated its “compliance specialist” positions, which had been responsible for independent loan checks, and eliminated mandatory underwriting checklists.
At the same time, Countrywide indicated to Fannie Mae and Freddie Mac that it had strengthened its underwriting standards, the lawsuit alleges.
Up to forty percent of the resulting loans in some months turned out to have material defects, which the lawsuit says was 10 times the industry rate. Countrywide went so far as to offer employees a bonus for rebutting the company’s own quality control department’s findings of defective loans, the lawsuit alleges.
In February, the U.S. settled with Citigroup for $158.3 million and Flagstar Bank for $132.8 million. The government settled with Deutsche Bank and its subsidiary MortgageIT for $202.3 million in May. A suit against Allied Home Mortgage Corp. is ongoing.
Bank of America settled similar claims earlier this year in a side deal accompanying the $25 billion mortgage servicing settlement with state attorneys general and federal agencies. The Charlotte bank agreed to pay $500 million upfront, with the possibility of paying $500 million more if principal forgiveness benchmarks weren’t met.
Bank of America also agreed to pay $2.4 billion earlier this year to settle shareholder claims that it misled investors about Merrill Lynch during that acquisition.
The bank’s shares were up slightly in midday trading, at $9.37.