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2 States Sue Countrywide

Illinois, California AGs allege borrowers deceived by lender

June 25, 2008

By MortgageDaily.com staff


As Countrywide Financial Corp. shareholders voted on whether to approved Bank of America Corp.'s proposed acquisition of the company, attorneys general in California and Illinois sued the lender. Meanwhile, Washington's governor also announced actions against the lender.

The Calabasas, Calif.-based company announced today that 69 percent its stockholders approved BoA's acquisition of the company at a special stockholders meeting. The deal is slated to close next Tuesday.

But the two lawsuits announced today indicate the deal will include some baggage.

California Attorney General Edmund G. Brown Jr. announced that the state filed a lawsuit in Los Angeles Superior Court against Countrywide, its Chairman and Chief Executive Officer Angelo Mozilo, and its President David Sambol. The suit was the result of a state investigation involving a review of hundreds-of-thousands of documents and interviews with scores of consumers and former employees.

The defendants are accused of deceitfully herding borrowers into risky mortgages with the sole objective of reselling the mortgages on the secondary market at huge profits.

Under intense pressure by the company, loan originators, underwriters and branch managers emphasized low teaser rates and misled borrowers about dramatic increases in monthly payments, prepayment penalties and negative amortization, the state claims. The loans were complex and difficult to understand, and loan officers memorized scripts on how to deceive borrowers.

The attorney general criticized the use of stated-income loans, yield-spread premiums and other broker incentives. The company was also criticized because customer service representatives handled 65 to 85 calls per day.

Because Countrywide securitized mortgages or sold them on the secondary market, California claims Mozilo and Sambol were successful in actively pushing for either significantly relaxed underwriting standards or exceptions to the guidelines. A Plano, Texas, center was reportedly set up to handle exceptions -- with as many as 20,000 loans processed on this basis monthly during 2006.

The state outlined how Countrywide's annual originations grew from $62 billion in 2000 to $463 billion in 2006 -- three times the pace of overall U.S. residential production. The company's securities trading volume reportedly increased from $0.6 trillion in 2000 to $3.8 trillion in 2006.

The high volume and poor underwriting helped push subprime delinquency to 27 percent as of February 2008, the statement said. Countrywide's California foreclosures reached 20,000 by May 2008.

"Countrywide was, in essence, a mass-production loan factory, producing ever-increasing streams of debt without regard for borrowers," Brown stated in the press release.

Over in Chicago, Illinois Attorney General Lisa Madigan today filed a lawsuit in Cook County Circuit Court against Countrywide Home Loans, Countrywide Financial Corp., subsidiary Full Spectrum Lending and Mozilo, a press release said. That lawsuit follows a nine-month probe by the state and accuses the company of engaging in unfair and deceptive conduct on a large scale in creating, originating, marketing and servicing unnecessarily risky and costly mortgage loans to borrowers who could not afford them.

"As failure rates on Countrywide loans began to escalate, the company intensified its originations of unaffordable and poorly underwritten loans to satisfy its obligations to Wall Street investors," the announcement stated. "Countrywide's unfair lending practices have harmed tens of thousands of borrowers who've been placed in unaffordable loans and, as a result, our communities are now being destabilized by a skyrocketing number of home foreclosures."

Madigan said Countrywide originated 94,000 mortgages in Illinois between 2004 and 2006 and operated around 100 retail branches in the state at its peak. She cited data that indicated the company was the largest subprime lender in Chicago during 2006.

She claims that in addition to relaxing underwriting standards for unqualified borrowers, Countrywide inflated income on loan applications and didn't base debt ratios on the full amount ultimately owed. On hybrid adjustable-rate mortgages, borrowers were only qualified at the start rate.

The attorney general explained that the structure of originator compensation encouraged them to place borrowers in risky loans.

"Countrywide used egregiously unfair and deceptive lending practices to steer borrowers into loans that were destined to fail," Madigan said in the press release. "As the nation's largest originator of mortgage loans, Countrywide's conduct has had and will continue to have a devastating financial impact on tens of thousands of families and many communities in Illinois."

The state is asking the court to require Countrywide to rescind or reform all loans that were originated using illegal tactics and to compensate borrowers who lost their homes to foreclosure "even if that requires Countrywide to repurchase loans from current investor owners." It is also requesting that foreclosures in process be delayed 90 days on impacted loans while the attorney general's office determines whether they can be modified to be affordable.

In Washington, Gov. Chris Gregoire announced the state plans to fine Countrywide Home Loans $1 million for discriminatory lending and require it to pay more than $5 million in unpaid assessments. She also said the state is seeking to revoke the lender's mortgage license because of alleged illegal activity.

The state reportedly reviewed 600 files last year in a fair-lending examination and found that Countrywide engaged in discriminatory lending that targeted minority communities. The investigation also uncovered under-reporting by the company.

"We intend to bring the full weight of the state on Countrywide to rewrite home loans for minority borrowers who may have been misled into signing predatory mortgages," Gregoire said in the statement.


People v. Countrywide
Los Angeles Superior Court case number LC081846

The People of the State of Illinois v. Countrywide Financial Corporation, a Delaware Corporation, et al
Case Number 08CH22994

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