The U.S. Justice Department is suing Bank of America over alleged mortgage fraud perpetrated against Fannie Mae and Freddie Mac by Countrywide, the giant mortgage originator purchased by Bank of America.
The government’s complaint seeks damages and civil penalties under the False Claims Act and the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 for engaging in a scheme to defraud the two government-sponsored enterprises, according to an announcement from Preet Bharara, the U.S. Attorney for the Southern District of New York.
Specifically, the complaint alleges that from at least 2007 through 2009, Countrywide and Bank of America implemented a new loan origination process called the “Hustle” (or “HSSL,” for “High-Speed Swim Lane”), which was intentionally designed to process loans at high speed and without quality checkpoints. The Hustle generated thousands of fraudulent and otherwise defective residential mortgage loans sold to Fannie Mae and Freddie Mac that later defaulted, causing over $1 billion dollars in losses and countless foreclosures.
This is the first civil fraud suit brought by the Department of Justice concerning mortgage loans sold to Fannie Mae or Freddie Mac.
“The fraudulent conduct alleged in today’s complaint was spectacularly brazen in scope,” Bharara said when announcing the litigation. “As alleged, through a program aptly named ‘the Hustle,’ Countrywide and Bank of America made disastrously bad loans and stuck taxpayers with the bill.”
According to the government, Countrywide initiated the Hustle in 2007 through its Full Spectrum Lending Division, just as loan default rates were increasing throughout the country and the GSEs were tightening their loan purchasing requirements to reduce risk.
Prosecutors said that according internal company documents, the goals of the Hustle were high speed and high volume, where loans “move forward, never backward” in the origination process. To accomplish these goals, the Hustle removed necessary quality control “toll gates” that could slow down the origination process, the prosecutors charged.
Instead, the Hustle relied almost exclusively on unqualified and inexperienced clerks, called loan processors, prosecutors added.
Michael Robinson, executive vice president of LEVICK and manager of the firm’s corporate and public affairs practice group as well as a former spokesman for the Securities and Exchange Commission and the Justice Department, looked at the case filing as a sign that the government wants some accountability in the cases stemming from the housing finance crisis.
“The search for perpetrators in the mortgage crisis of 2008 is still active,” Robinson said, He said he was not surprised that the case as announced in October of an election year or that it was a civil case and not a criminal indictment. “The standard of proof it significantly lower in civil matters and, more importantly, settlements are easier to reach when all your talking about is money and not someone going to prison,” he added.