Countrywide Whistle-Blower Says U.S. Talks Spurred Suit

A former official at Bank of America Corp.’s Countrywide unit said he went to federal authorities and filed a whistle-blower lawsuit after learning the government might settle with the lender.

Edward O’Donnell, who now works for Fannie Mae, said he contacted the office of Manhattan U.S. Attorney Preet Bharara in February 2012 after reading in news accounts that the Justice Department was considering settling with large U.S. banks accused of selling bad mortgages to government-sponsored enterprises, or GSEs.

In a complaint filed that month under the False Claims Act and unsealed eight months later, O’Donnell alleged that Countrywide Financial Corp. issued defective mortgages under its “High Speed Swim Lane” program, or HSSL, and then sold them to Fannie Mae and Freddie Mac. The U.S. later joined the suit and the trial, which began Sept. 24 in federal court in New York.

“The government didn’t have any information about the HSSL and the fact that loans had been sold to the GSEs and others such as Fannie Mae and Freddie Mac that clearly didn’t qualify as quality investment grade,” O’Donnell testified yesterday. “They weren’t aware of it, so no one had been held accountable.”

The U.S. alleges that under the HSSL program, Countrywide boosted profits by “benching” underwriters and replacing them with inexperienced “loan specialists” who were forced to meet quotas and ignore quality control.

$1.6 Million

Under whistle-blower laws, O’Donnell said he could collect as much as $1.6 million of any monetary damages awarded to the U.S. if the jury finds Bank of America, which acquired Countrywide in 2008, liable for fraud.

U.S. District Judge Jed Rakoff, who is presiding over the case, told jurors he would make the determination about damages, if necessary, after they rendered their verdict on liability.

Brendan Sullivan, a lawyer for Countrywide, told the jury in his opening statement that while the U.S. claims the loans were faulty, the bank had created a process to speed the approval of prime loans after it shifted its focus from subprime loans. He said no one at Countrywide made misrepresentations to Fannie Mae or Freddie Mac or defrauded them.

15 Days

Under the HSSL program, O’Donnell, who as head of risk management at a Countrywide unit, said the processing of loans was sped up from 20 to 30 days down to 15 days or less.

O’Donnell said that after the HSSL program was introduced in August 2007, his staff conducted an audit of its loans to determine how many were deemed “defective” or “severely unsatisfactory” and therefore couldn’t be rated for sale to Fannie Mae or Freddie Mac.

An audit of loans processed under the HSSL program that October found that 92.3 percent of them were deemed high risk.

Assistant U.S. Attorney Jaimie Nawaday showed jurors a series of e-mails that O’Donnell received from Countrywide superiors about continuing with the HSSL program that urged loan specialists to “increase the volume” and “increase velocity.”

O’Donnell testified he warned Countrywide officials about the failure rate of the HSSL loans and that scrutiny and audits of the loan specialists should continue. Underwriters who previously processed loans had been let go, he said, and loan processors who replaced them were told to close loans and not worry if they were later defective.

He drafted a memo to superiors complaining that the continued push to generate loans that were “substandard” could put all of Countrywide’s employees at risk. He never sent the message, testifying, “I thought sending that e-mail would be slitting my own throat.”

O’Donnell is scheduled to resume his testimony Sept. 30 with cross-examination by a lawyer for the banks.

The case is U.S. v. Countrywide Financial Corp., 1:12-cv-01422, U.S. District Court, Southern District of New York (Manhattan).