U.S. prosecutors are seeking a maximum penalty of $863 million from Bank of America Corp (NYSE:BAC) in connection with the mortgage fraud case filed against it for selling defective loans to Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC), according to a report from Bloomberg.

Bank Of America BAC

Bank of America’s unit guilty of defrauding

A jury in the federal court of Manhattan found Countrywide Financial Corp, a unit of Bank of America Corp (NYSE:BAC) guilty of defrauding the mortgage giants by selling thousands of defective loans.  The bank was the first financial institution that went to trial in the first mortgage fraud case filed by the United States government.

The jury also found Rebecca Mairone, an executive of Countrywide Financial Corp., liable for defrauding the Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC). She is the only single individual named as defendant in the case. The government is also asking the government to impose a penalty against her based on her ability to pay.

Prosecutors describe the fraud

In a court filing, the prosecutors in the case described the fraud committed by Bank of America Corp. (NYSE:BAC) as “simple but brazen.” The prosecutors said the bank created bad loans and intentionally sold those to cheat Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) out of money.

The prosecutors emphasized that the amount of penalty against Bank of America Corp (NYSE:BAC) is warranted under the law given the extent of the culpability of Countrywide, the bank’s ability to pay, and the gross loss suffered by the entities from the mortgage fraud.

Last month, United States District Judge Jed Rakoff told prosecutors that he would determine the amount of the penalty on a later date. The defendants and prosecutors in the case are set to argue the issue on December 5.

Penalty amount increased

In their latest filing, the prosecutors increased the amount of penalty they are seeking from Bank of America Corp (NYSE:BAC) from their previous demand of $848 million. At the time, Assistant U.S. Attorney Pierre Armand offered a more lenient option for Countrywide, and told Judge Rakoff that the bank could pay around $131 million, the estimated losses incurred by Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC).

Commenting on the demand of the government, Lawrence Grayson, spokesperson for Bank of America Corp (NYSE:BAC) said, “We believe the filing overstates the volume of loans and appropriate measure of damages.” On the other hand, Mark Mukasey, the legal counsel representing Mairone, plans to argue against any penalty that will be imposed against his client.