The United States federal government filed a lawsuit against Bank of America Corp (NYSE:BAC) for allegedly misrepresenting the quality of home loans sold to government backed mortgage giants, Fannie Mae – Federal National Mortgage Association (OTC:FNMA) and Freddie Mac – Federal Home Loan Mortgage Corp (OTC:FMCC).
U.S. Attorney for the Southern District of New York, Preet Bharara, filed the case against Bank of America Corp (NYSE:BAC) in the federal court in Manhattan. The government is seeking $1 billion in damages.
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Based on the allegations of the federal government, Countrywide Financial Corp, which is a mortgage company owned by Bank of America, failed to implement quality control on loans from 2007 until 2009, under its origination program called “Hustle.” Under the program, Countrywide eliminated all checks in loan quality to accelerate the process and increase the number of loans it could issue.
Countrywide’s origination program is also called as High Speed Swim Lane (HSSL). Based on the company’s internal documents, HSSL means remove “toll gates” and have loans “move forward, never backward.”
According to the lawsuit, the company processed loans faster by removing underwriter review of high-risk loans and mandatory checklists on underwriting instructions. The company also eliminated compliance specialists and changed its compensation structure base on loan volume.
The federal government also alleged that Countrywide made false claims that the loans were qualified for insurance from Fannie Mae and Freddie Mac.
U.S. attorney Bharara described Countrywide’s actions as “spectacularly brazen in scope.” According to him, “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.” He said the company “made disastrously bad loans and stuck taxpayers with the bill.”
The federal government filed the lawsuit under the Federal False Claims Act and the Financial Institutions Reform, Recovery, and Enforcement Act. Prosecutors use these laws to protect taxpayers from the mortgage frauds committed by banks, and make them accountable for their bad actions; which resulted in the financial meltdown in 2008.
Fannie Mae – Federal National Mortgage Association (OTC:FNMA) and Freddie Mac – Federal Home Loan Mortgage Corp (OTC:FMCC) collapsed due to the mortgage bubble. The United States government was compelled to bail out the mortgage giants, by providing $142 billion taxpayers money.
The Federal Housing Finance Agency (FHFA) filed a lawsuit against 18 major banks in the United States, for allegedly violating federal securities law and other regulations related to the sale of residential, private-label, mortgage-backed securities.
Bank of America Corp (NYSE:BAC) settled the False Claims Act fraud allegations filed by the Eastern District of New York for $1 billion last February. The bank also agreed to pay $2.43billion to settle complaints for allegedly misleading investors regarding the acquisition of Merrill Lynch & Co.