Bank of America Sued for Alleged Countrywide "Hustle"

Bank of America (BOA) was sued inrnFederal Court today for civil mortgage fraud in a complaint seeking civilrnpenalties as well as treble damages and penalties.  The suit alleges that Fannie Mae and FreddiernMac lost over $1 billion because of defaulted loans fraudulently sold them byrnCountrywide Mortgage and BOA. </p

The suit alleges the from at leastrn2007 through 2009 implemented a new loan origination process called thern”Hustle,” which was intentionally designed to process loans at high speed andrnwithout quality checkpoints, and which generated thousands of fraudulent andrnotherwise defective residential mortgage loans sold to Fannie Mae and FreddiernMac (the GSEs) that later defaulted.  ThernHustle continued under the ownership of BOA.</p

Thernsuit was brought by Preet Bharara, U.S. Attorney for the Southern District ofrnNew York and is the first civil fraud suit that the Department of Justice hasrnfiled on behalf of Fannie Mae or Freddie Mac. rnJoining Bharara in the Compliant were Steve A. Linick, the InspectorrnGeneral of the Federal Housing Finance Agency (“FHFA”), and Christy L. Romero,rnthe Special Inspector General for the Troubled Asset Relief Program (“SIGTARP”).</p

ThernComplaint charges that, in buying loans from Countrywide and BOA the GSEsrnrelied on the lenders’ representations and warranties that the loans compliedrnin all respects with the standards outlined in the GSEs’ selling guides andrnlenders’ sales contracts.  Because theyrndo not do a pre-purchase review these representations and warranties arerncentral to the GSEs purchase decisions.</p

Countrysiderninitiated the High-Speed Swim Lane (HSSL or “Hustle”) in 2007 just as loan defaultrnrates were increasing and the GSEs were tightening their purchase requirements.rnHustle sought to maintain high speed and high volume in loan processing.  To this end, quality control “toll gates” werernremoved.  Underwriters were eliminated fromrnloan production in favor of unqualified and inexperienced clerks or loanrnprocessors.  Hustle also did away withrncompliance specialists who were supposed to insure that any conditions attachedrnto an approval were satisfied.  Otherrnshortcuts included reducing the guidance previously given processors, providingrnfinancial incentives for volume rather than quality and discontinuing financialrnpenalties for poor loan quality.</p

The Hustle operated withinrnCountrywide’s Full Spectrum Lending Division where senior management wasrnrepeatedly warned that Hustle’s shortcuts would yield disastrous results.  By February 2008, post-closing qualityrnreviews showed defect rates of approximately 37%, far above the industryrnstandard defect rate of 4 to 5%.  Onernpre-funding quality review in early 2008 showed an overall defect rate of 57rnpercent rising to nearly 70 percent of stated income loans.  Full Spectrum senior management, however,rnmade to changes to the Hustle, restricting dissemination of the review instead.</p

Instead of notifying the GSEs thatrnthey had been purchasing large volumes of fraudulent and otherwise defectivernloans that did not meet GSE guidelines, Countrywide concealed the defect rates andrncontinued the Hustle. In addition, Full Spectrum Lending initiated a one-timernbonus to its quality control personnel to “rebut” the defect rates found byrncorporate quality control after which the final defect was revised down to 13%.rnCountrywide concealed this bonus plan from the GSEs as well.</p

In July 2008 BOA acquiredrnCountrywide but the suit charges that the Hustle continued unabated throughrn2009 and at no time did BOA take any steps to disclose the program to the GSEs.  Throughout the time it was in operation Countrywidernand BOA sold thousands of Hustle loans to the GSEs that they knew did not meetrntheir representations and warranties of quality and after the loans defaulted, BOArnresisted buying many of them back, despite the presence of fraud,rnmisrepresentation, and other obvious violations of GSE requirements.</p

Manhattan U.S. Attorney PreetrnBharara said: “For the sixth time in less than 18 months, this Office has beenrncompelled to sue a major U.S. bank for reckless mortgage practices in thernlead-up to the financial crisis. The fraudulent conduct alleged in today’srncomplaint was spectacularly brazen in scope. As alleged, through a programrnaptly named ‘the Hustle,’ Countrywide and Bank of America made disastrously badrnloans and stuck taxpayers with the bill. As described, Countrywide and Bank ofrnAmerica systematically removed every check in favor of its own balance – theyrncast aside underwriters, eliminated quality controls, incentivized unqualifiedrnpersonnel to cut corners, and concealed the resulting defects. These toxicrnproducts were then sold to the government sponsored enterprises as good loans.rnThis lawsuit should send another clear message that reckless lending practicesrnwill not be tolerated.”</p

SIGTARP Special Inspector GeneralrnChristy Romero said: “The complaint filed today alleges serious and significantrnmisrepresentations that Bank of America made before and during the time taxpayersrninvested $45 billion in TARP funds in the bank. SIGTARP and its law enforcementrnpartners will investigate allegations of wrongdoing by TARP recipients;rnparticularly conduct that results in substantial losses to the government andrntaxpayers.”

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