BofA $1.3 Billion ‘Hustle’ Judgment Tossed by Appeals Court

  • Panel rules prosecutors failed to prove fraud at trial
  • Countrywide sold loans in 2007 to Fannie Mae to boost revenue

Bank of America Corp.’s decision to fight government allegations that it defrauded Fannie Mae and Freddie Mac paid off as a federal appeals court threw out a judgment of almost $1.3 billion against the bank.

BofA’s Countrywide Financial unit was the first bank to be found at fault at trial by a federal jury for selling defective mortgage loans under a decades-old statute enacted during the savings-and-loans crisis. The civil fraud suit was one of several brought against banks by Manhattan U.S. Attorney Preet Bharara using the law.

A 2013 jury verdict finding the bank liable and a $1.27 billion penalty imposed by the trial judge were tossed by a federal appeals court in New York, which ruled on Monday that the government failed to prove the bank intended to defraud Fannie and Freddie when it sold them the mortgages. The court also threw out a $1 million penalty against Rebecca Mairone, a former executive who oversaw the creation of a program called the “Hustle,” which sped up loan processing.

“This case was a massive government overreach from inception,” Josh Rosenkranz, who represented Mairone in her appeal, said on Monday. “The government tried to take an allegation of a garden-variety breach of contract case and turn it into a fraud, with crushing and career-ending penalties.”

Contract Breach

The government only showed the bank sold mortgages that it knew weren’t of the quality promised in its agreements, which at worst, was only a breach of contract, the appeals court said.

"Fraudulent intent must be found at the time of the allegedly fraudulent conduct," the appeals panel said.

The U.S. can ask the entire panel of the federal appeals court judges to reconsider the panel’s ruling. Jim Margolin, a spokesman for Bharara, declined to comment on the decision.

Bharara had alleged that Countrywide generated thousands of defective loans and sold them to the two home-mortgage finance companies now under government control. Countrywide sold the loans to boost revenue in the tightening credit market in mid-2007, according to evidence presented by the U.S. at trial. The program called the "High Speed Swim Lane," or the “Hustle” ran until 2008.

Underwriters Benched

Under the system, underwriters who were trained to review the loans were “benched” in favor of “loan specialists,” or clerks who lacked sufficient training, the government said. The speed with which more than 28,800 loans were processed was reduced from 60 days to as little as 10 days, according evidence the U.S. presented at trial. Safeguards were lifted to boost the number of loans which the lender completed and sold to government sponsored enterprises, or GSEs, government lawyers said.

"We are pleased with the appellate court’s decision,” Lawrence Grayson, a spokesman for the Charlotte, North Carolina-based bank, said by phone. He declined to comment further. 

Bharara sued under the Financial Institution Reform, Recovery and Enforcement Act of 1989, or FIRREA. The statute, enacted during the savings-and-loan crisis of the 1980s, allows the U.S. to sue an individual or group for fraud that affects a federally-insured financial institution.

Countrywide, then based in Calabasas, California, was once the biggest U.S. residential home lender, originating or purchasing about $1.4 trillion in mortgages from 2005 to 2007. The bulk of them were sold to investors as mortgage-backed securities. Countrywide earned at least $165 million using Hustle, government lawyers argued at trial, allowing the company to maintain revenue in a “cratering” market for subprime mortgages. Government-sponsored enterprises, or GSEs, such as Fannie Mae and Freddie Mac bought single-family mortgages from lenders.

17 Banks Sued

Bank of America, which acquired Countrywide in 2008, was among 17 financial institutions sued in September 2011 by Fannie Mae and Freddie Mac’s regulator, the Federal Housing Finance Agency, over losses on mortgage securities sold to the companies.

Bank of America in 2014 agreed to pay $16.65 billion to resolve federal and state claims that the bank and its units, including Countrywide and Merrill Lynch for financial fraud prior to and during the financial crisis.

The case is U.S. v. Countrywide Home Loans Inc., 15-496, U.S. Court of Appeals for the 2nd Circuit (New York).

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