A former official at Bank of America Corp.’s Countrywide unit who filed a whistle-blower lawsuit testified that the lender created a business model that approved a home mortgage loan in 13 minutes in mid-2007.
Edward O’Donnell sued Bank of America under the False Claims Act, alleging it issued defective mortgages and sold them to Fannie Mae and Freddie Mac, and the U.S. later joined the case filed in Manhattan federal court. This is the first time the government has gone to trial accusing a bank of fraud for loans sold to the two government-sponsored mortgage-finance companies.
The U.S. alleges Countrywide Financial Corp. boosted profit by “benching” underwriters who previously evaluated the accuracy of borrower applications and credit-worthiness before issuing loans that were sold to Fannie Mae and Freddie Mac.
At issue in the trial is the lender’s “High Speed Swim Lane” program, or HSSL, started in August 2007. The program processed loan applications in 10 to 15 days instead of 45 to 60 days, according to the U.S. Countrywide was acquired by Charlotte, North Carolina-based Bank of America in 2008.
O’Donnell, who now works for Fannie Mae, described today how in June 2007, before the HSSL program was begun, some Countrywide officials became concerned after a “loan processor” employee at the lender’s NCA unit completed the “clear-to-close” process of approving paperwork for a home loan in 13 minutes.
Assistant U.S. Attorney Jaimie Nawaday showed jurors an e-mail indicating that the review process began at 3:53 p.m. and the loan was approved at 4:06 p.m. that same day.
“It would not be enough time,” O’Donnell told jurors. He listed the raft of paperwork an employee would have to review including title searches, deeds, taxes, the credit and employment history of the borrower, a determination of whether the home was located in a flood zone, property appraisals and a comparison with similar properties.
“There’s a lot to do and 13 minutes is not enough to do very much at all,” he said.
Brendan Sullivan, a lawyer for Countrywide, told the jury in his opening statement yesterday that while the U.S. claims the loans were faulty, the bank had actually created a process to speed the approval of prime loans after it shifted focus away from subprime loans. He said no one at Countrywide made misrepresentations to Fannie Mae or Freddie Mac.
Enu Mainigi, a lawyer for Bank of America and Countrywide, today objected to allowing the e-mail into evidence because she said it pertained to a June 2007 transaction that occurred at another Countrywide unit, months before the HSSL program was introduced. U.S. District Judge Jed Rakoff, who is presiding over the case, denied her request, saying it was evidence the jury could consider against the bank defendants.
O’Donnell said he was forwarded an e-mail that discussed the loan incident from another Countrywide executive and testified it appeared to be an instance when employees had “violated their authority” and issued a clear-to-close on a loan.
Jurors were shown a copy of the 11-page e-mail O’Donnell received on June 25, 2007. In the chain of messages, one Countrywide executive attributed the incident to “considerable pressure to close loans,” saying the employee had explained that she was required to meet a quota for approving loans.
“This subject throws a red flag” one Countrywide official wrote, adding that the employee had “blindly” signed off on the loan to get it closed.
“Such behavior is strictly prohibited and is not tolerated as fraud is a serious matter,” the supervisor said. “I know this may slow you down during this month end, but we have to consider quality while pushing out quantity, or suffer the consequences.”
O’Donnell said that Robert Price, a Countrywide executive who reported to him, expressed concerns about NCA’s process. Price also expressed concerns to him that the group was closing out loans without adequate screening, O’Donnell said.
In the e-mails shown to the jury, Price said he’d investigated the incident. O’Donnell testified Price expressed concern that the expedited process and increased quotas set for NCA employees resulted in loans that weren’t of investment quality.
“The overwhelming response is the pressure to hit the numbers, oftentimes before they are allowed to leave, no matter what time it is, is driving some of this behavior,” Price wrote to his superior.
“I don’t disagree with driving targeted goals but the ones they are being given right now with the staff they have and the disarray they are in is obviously contributing to this,” Price wrote. “It is not uncommon for employees feeling pressure to take short cuts and make poor decisions to hit the numbers.”
Price’s superior responded, “We will not stop the push for numbers, but we continue to push quality as well.”
O’Donnell is scheduled to continue his testimony tomorrow.
The case is U.S. v. Countrywide Financial Corp., 1:12-cv-01422, U.S. District Court, Southern District of New York (Manhattan).