June 25 (Bloomberg) -- Countrywide Financial Corp., the mortgage lender that lost $2.5 billion amid rising defaults and foreclosures, was sued by California and Illinois for allegedly luring borrowers into risky loans they couldn't afford.

Countrywide and Chief Executive Officer Angelo Mozilo were named in suits, filed today, claiming the biggest U.S. home lender used deceptive practices such as low ``teaser'' rates to entice thousands of borrowers into adjustable-rate loans without adequately informing them that payments would balloon in later months.

The two lawsuits were filed the same day Countrywide's shareholders approved Bank of America Corp.'s $3 billion takeover offer, clearing the way for the lender's bailout. Washington Governor Christine Gregoire said that state will fine Countrywide $1 million and revoke its license for allegedly discriminating against minority borrowers.

``It's going to be increasingly expensive for BofA because they are taking on all of these lawsuits,'' said David Olson, president of Wholesale Access Mortgage Research, in Columbia, Maryland. Countrywide was ``too aggressive and they should be punished.''

Countrywide fell 8 cents to $4.58 in New York Stock Exchange composite trading. The stock has slumped 88 percent in the past year. Bank of America fell 7 cents to $26.55.

Countrywide might face legal costs of $1 billion to $2 billion, CreditSights Inc. analyst David Hendler said today in a report.

Civil Fines

California Attorney General Jerry Brown's office filed its complaint, also naming Countrywide President David Sambol and a division, in state court in Los Angeles. Illinois Attorney General Lisa Madigan filed in the Cook County court.

``We are fully cooperating with the offices of the California and Illinois attorneys general,'' Calabasas, California-based Countrywide said in an e-mailed statement. ``We are particularly focused on working with our customers who are having difficulty making their mortgage payments, or foresee difficulty with the future rate resets.''

Scott Silvestri, a Bank of America spokesman, declined to comment.

Both lawsuits seek restitution for homeowners, without being specific. California also seeks civil fines of as much as $2,500 for each violation of state laws banning unfair business practices and false advertising.

Foreclosures

Madigan is seeking a 90-day stay on all Countrywide foreclosures in process and an order allowing revisions to loan terms for borrowers who were subject to illegal practices.

Countrywide also owes Washington $5 million in unpaid assessments, Gregoire said in a statement.

``The allegation that Countrywide preyed on minority borrowers is extremely troubling to me,'' Gregoire said in the statement. ``We intend to bring the full weight of the state on Countrywide to rewrite home loans for minority borrowers who may have been mislead into signing predatory mortgages.''

Starting in 2000, Countrywide lured customers into unsafe loans to boost profits, according to the complaints.

``The damage done by Countrywide is enormous,'' Brown said at a news conference in Beverly Hills, California. ``It ripples through Wall Street and Main Street.''

As of Dec. 31, about 43 percent of Countrywide's $87 billion loans were in California, followed by Florida with 7 percent, the company said in a Feb. 29 regulatory filing.

In May, 20,000 Californians lost their homes to foreclosure and 72,000 others were in default on loans, according to court documents. The state claimed in its suit that a ``large percentage'' of loans to these properties was made by Countrywide, without being specific.

Illinois Loans

In Illinois, Countrywide has about 100 branch offices, from which it made 94,000 loans to consumers from 2004 to 2006, Madigan said at a news conference in Chicago.

In telemarketing calls and solicitations by e-mails and letters, Countrywide touted low introductory rates and monthly payments that purportedly would save borrowers money over their existing mortgages when the principal amount of the loan would increase, according to court documents.

Countrywide customers were urged to refinance their loans or take out home equity loans with these complex adjustable- rates and often didn't understand that the low monthly payments wouldn't last, according to the complaints.

Lower Standards

The company lowered its underwriting standards, pushed loans that required no documentation of income and gave incentives to loan officers and brokers to steer borrowers into riskier loans, California and Illinois claimed in the suits.

Countrywide's name became synonymous with the boom in loans to borrowers with poor credit as Mozilo, who started the company in 1969, built it into the biggest home lender by relaxing lending standards and hiring scores of brokers across the country. When housing prices began falling in 2006, owners who were using home equity to pay their debts were forced to default, leading to record foreclosures.

The lender had about 9 million borrowers nationwide when the Bank of America deal was announced in January.

Florida Attorney General Bill McCollum on Jan. 17 issued a subpoena to Countrywide seeking information about loan underwriting and customer service.

Last month, Senator Charles Schumer, a New York Democrat, asked the Federal Trade Commission to investigate ``an emerging pattern of apparent misconduct.''

The California case is People of the State of California v. Countrywide Financial Corp., LC081846, Los Angeles Superior Court. The Illinois case is People of the State of Illinois v. Countrywide Financial Corp., 08ch22994, Cook County, Illinois Circuit Court, Chancery Division (Chicago).

To contact the reporter on this story: Karen Gullo in San Francisco at kgullo@bloomberg.net; Andrew M. Harris in Chicago at aharris16@bloomberg.net.

Last Updated: June 25, 2008 20:21 EDT