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$1 Billion Lawsuit Alleges Countrywide, BofA Deceived GSEs on Loan Sales

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In another blow to Bank of America Corp., the U.S. government accuses Countrywide Home Loans, through its former subprime sister, of operating a scheme that rapidly sped up the loan closing process by avoiding quality control, abandoning mortgage underwriters and creating incentives to abuse automated underwriting on conventional agency loans.

A complaint was filed Wednesday in U.S. District Court for the Southern District of New York.

According to the lawsuit, Countrywide Home Loans Inc. launched a fraudulent origination program — the “High-Speed Swim Lane” or “hustle.”

The program, which was operated by Countrywide’s subprime unit Full Spectrum Lending, was allegedly created as U.S. mortgage performance began to deteriorate to enable the sale of defective loans to Fannie Mae and Freddie Mac by processing loans at high speeds without quality checkpoints.

Countrywide was the biggest seller of loans to the government-sponsored enterprises.

Countrywide is accused of using unqualified and inexperienced loan processors in place of underwriters in the production process even for high-risk loans like stated-income mortgages. As long as an “accept” rating was obtained from the “CLUES” automated underwriting system, then no underwriter was involved in the transaction.

Although loan processors were given greater responsibility, they were given less guidance.

“For example, mandatory checklists for performing important underwriting tasks (such as evaluating an appraisal or assessing the reasonableness of stated income) were eliminated,” the Justice Department stated. “Loan processors were also financially incentivized to put volume ahead of quality, as Full Spectrum Lending changed its compensation plan to provide bonuses based solely on loan volume. Reductions to compensation for poor loan quality were discontinued.”

In addition, the processors were allegedly inputting fraudulent data into the AUS.

Compliance specialists were also abandoned through the program, according to the lawsuit, while quality control personnel were given bonuses to successfully dispute defect rates.

Senior management at Full Spectrum allegedly ignored warnings about the program and disregarded high defect rates.

The government claims that BofA, which is named along with Countrywide as a defendant, continued the program after it acquired Countrywide Financial Corp. in July 2008. The alleged actions went on until 2009.

“Countrywide and Bank of America made disastrously bad loans and stuck taxpayers with the bill,” the government announcement stated. “As described, 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.

“These toxic products were then sold to the government sponsored enterprises as good loans.”

Even after the acquisition of Countrywide, the government claims BofA failed to disclose the “Hustle” to Fannie and Freddie and resisted repurchasing the loans.

Damages and civil penalties are sought under the False Claims Act because of the alleged deceit involved in the loan sales. Also allegedly invoking the False Claims Act was the $183 million in Treasury advances to cover losses at Fannie and Freddie — some of which allegedly resulted from the defendants’ actions — and “advance a government program or interest.”

“Defendants knowingly, or acting in deliberate ignorance and/or with reckless disregard of the trust, presented a fraudulent claim for payment or approval,” the complaint states.

Former federal housing commissioner and current Mortgage Bankers association David H. Stevens previously told Mortgage Daily that errors or defects discovered on FHA-insured loans that go bad where an FHA insurance claim has already been filed can be considered a violation of the False Claims Act and subject to treble damages, “meaning you pay three times the outstanding balance of the loan.”

Stevens emphasized, “Not three time the net of the loss; three times the outstanding balance of the loan.”

However, Stevens noted at the time that with defects on loans sold to Fannie and Freddie — the worst-case scenario is repurchase liability or indemnification.

The lawsuit against BofA seeks treble damages that are “three times the amount of damages which the GSEs have sustained because of defendants’ actions.” Losses from BofA’s alleged scheme are $1 billion, though the government only says its lawsuit is for more than $1 billion.

Civil penalties of between $5,500 and $11,000 are also sought pursuant to the False Claims Act for each false or fraudulent claim.

Civil penalties are additionally sought under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989.

The Department of Justice said this it the sixth time during the last year and a half that it has sued a major bank for “reckless mortgage practices in the lead-up to the financial crisis” and called BofA’s actions “brazen in scope.”

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