Bank of America was hit with a fraud lawsuit by the United States this week. Accusations include costing Americans more than $1 billion in losses when it sold “toxic” lawsuits to both Fannie Mae and Freddie Mac.
Whistleblower
The suit, which was filed this past Wednesday, is a result of a whistleblower and is also the first civil suit brought by the Justice Department due to a whistleblower. Remember, many of the big mortgage names were bailed out with tax dollars in 2008. This is when the recession officially began. But this is just another problem in a long line of problems Bank of America is facing. Its CEO is feeling the heat, too as he wonders what’s next for the nation’s second largest American bank. And like the CEO of the largest bank, JPMorgan Chase, Brian Moynihan will likely take the same path Jamie Dimon has.
You may recall the lawsuit filed by the state of New York against JPMorgan Chase. It resulted in its CEO Jamie Dimon unleashing his disdain over the results of “doing the government a favor” when he and his bank bought out troubled mortgager Bear Stearns around the same time Bank of America bought out troubled Countrywide Financial Corp. At one time, Countrywide was the largest mortgage lender in the U.S. before it fell into the hands of its less than noble – and criminal – leader, Angelo Mozilo. He was ordered to pay a record $22.5 million penalty in 2010 to settle SEC charges that he and two other Countrywide executives had misled investors as the subprime mortgage crisis exploded.
The settlement also permanently barred Mozilo from ever again serving as an officer or director of a publicly traded company. This latest lawsuit likely won’t affect him, however. Instead, Bank of America will be forced to bear the brunt of what ultimately happens. While there are similarities with the JPMorgan suit, there are significant differences, too.
The Hustle
The complaint was filed in Manhattan federal court and in it, it lays out the assertions of the government that in 2007, Countrywide invented and Bank of America continued a scheme labeled by the government as the “Hustle” in order to speed up the processing of residential home loans. It was also known as HSSL for “High Speed Swim Lane,” and it operated under the motto “Loans Move Forward, Never Backward”. The government insists in the suit that it attempted to bypass “toll gates” that were in place to ensure that loans were sound and with no fraudulent efforts.
This program, in essence, kept underwriters out of the approval process unless the loans were especially risky. The underwriters were replaced with “loan specialists” who had no experience in the loan approval process. Of course, defect rates – close to 40% at times – began emerging and soon, they were significantly higher than industry norms. Still, Countrywide kept this information from both Fannie Mae and Freddie Mac. Worse, the mortgage company rewarded its staff members who were able to work around problems when they were discovered.
Soon, both defaults and foreclosures began crippling the company and the bank refused to buy back those defaults from the government. This went on for more than a year before it began unraveling.
The fraudulent conduct alleged in today’s complaint was spectacularly brazen in scope,
U.S. Attorney Preet Bharara in Manhattan said.
Countrywide and Bank of America made disastrously bad loans and stuck taxpayers with the bill.
Triple Fines
The suit outlines the civil fines and damages that are triple what is usually allowed in a federal False Claims Act suit. The government has been successful in the past when dealing with Wall Street using this law.
For its part, a BoA spokesperson released a statement,
Bank of America has stepped up and acted responsibly to resolve legacy mortgage matters. The claim that we have failed to repurchase loans from Fannie Mae is simply false. At some point, Bank of America can’t be expected to compensate every entity that claims losses that actually were caused by the economic downturn.
He’s referring to the $1 billion settlement the bank was forced to pay earlier this year, using the same law, over loans that had been submitted to FHA for insurance.
Former BoA CEO Kenneth Lewis paid $2.5 billion for Countrywide several years ago and since then, the bank has lost more than $40 billion in both mortgage litigation and investor demands to buy back soured loans. Many of these costs are associated with Merrill Lynch. Weeks ago, Bank of America agreed to settle yet another lawsuit, this time to the tune of $2.4 billion. This suit accused the bank of misleading investors regarding the takeover.
What are your thoughts? Are you with a growing number of consumers/taxpayers who are beginning to wonder if these hefty fines are even serving a purpose? What, if anything, should happen to the CEOs of these banks? Share your thoughts with us.
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