Federal Government Sues Bank of America for Fraud: Fannie Mae and Freddie Mac Want Actuals and Exemplary Damages From Countrywide "Hustle" Scheme. Bank of America Says Nope.
The federal government has sued the second-biggest bank in the country, Bank of America Corp., in United States District Court for the Southern District of New York for fraud. That's right: fraud, which brings with it the possibility of punitive (exemplary) damages, which under the federal False Claims Act are set at treble ( three times) the amount of actual damages incurred.
That's right: the federal government is suing Bank of America for fraud and asking the courts to order the bank to pay the federal government over a billion dollars in damages. Legally, the suit is based upon the False Claims Act and the Financial Institutions Reform, Recovery and Enforcement Act and it's asking not just for actual damages but for exemplary ones, too.
Bank of America has been quick to respond. Here is their initial, complete statement on the matter:
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 were actually caused by the economic downturn.
The federal government is alleging in its civil lawsuit that it wants the defendant, Bank of America, to cover the damages that FNMA (Fannie Mae) and Freddie Mac (FMCC) incurred from buying home loans that were later found to less than stellar, leaving the taxpayers holding the bag for the bad mortgages.
Of course, these bad things didn't start with Bank of America. They started with Countrywide, whose mortgages Bank of America bought in 2008.
What the complaint alleges is that Countrywide came up with a profitable scheme to get more people into mortgages that is being called the "Hustle." The Countrywide Hustle debuted in 2007 and worked like a charm, apparently.
Officially, it was a program known as "Loans Move Forward, Never Backward," where Countrywide's people worked to erase the checkpoints which would have sounded the alarm that the home loan being analyzed might not be on the up and up. Countrywide also handed out bonuses to those employees who made the most home loans.
Which meant more loans were made, of course, and which also proved that those checkpoints were good things, since those speedy quick home loans ended up with an alleged "defect rate" of around 40%. The loan originator, Countrywide or Bank of America, did not volunteer to buy those notes back from Fannie Mae or Freddie Mac, according to the pleadings just filed.
The Complaint additionally alleges that this abnormally high bad loan rate was not shared with Fannie Mae and Freddie Mac. A material misrepresentation that hurt Fannie Mae and Freddie Mac which has now become part of this fraud action.
The Hustle continued into 2009, after Bank of America had bought out Countrywide. Accordingly, the Complaint is arguing that Bank of America is liable for the Hustle Fraud damages not only as the successor to Countrywide but because BofAm did the Hustle, too.
You'll recall that this isn't the first big financial slap to Bank of America by the federal government: it was just last February that Bank of America settled another fraud case, agreeing to pay $1 billion in resolution of allegations made by the U.S. Attorney for the United States District Court for the Eastern District of New York on behalf of the Federal Housing Administration (FHA). No wrongdoing was admitted at the time.
Here is the press release issued by U.S. Attorney Preet Bharara which accompanied the filing of the lawsuit yesterday: