(Reuters) – Bank of America Corp stands trial this week over alleged fraud committed against Fannie Mae and Freddie Mac, the U.S. government enterprises underwriting mortgages. BA’s Countrywide unit will be charged of approving defective home loans in a process called “Hustle”.
In what is to be the US government’s first financial crisis case to go on trial versus a major bank over deficient mortgages, selection of jury members will commence in federal court in New York on Tuesday, unless a last-minute settlement ensues.
The trial is reminiscent of the billions of dollars in legal liabilities incurred by the Bank of America due to its 2008 acquisition of Countrywide Financial Corp, considered a poster child of the mortgage meltdown.
The U.S. Justice Department filed the civil lawsuit in 2012, accusing the bank for over $1 billion losses incurred by Fannie Mae and Freddie Mac when the mortgages bought from the major bank later defaulted. Subsequently, fresh evidence and pre-trial rulings by U.S. District Judge Jed Rakoff have pared back the case.
Bank of America has declared the lawsuit’s grounds are “simply false” and that it “cannot be expected to recompense each entity that claims losses actually brought about by the economic crisis.”
A bank spokesperson refused to give comments prior to the trial, which could take five weeks to resolve.
‘HIGH SPEED SWIM LANE’
The government court case arises from a whistleblower case raised by former Countrywide Financial Corp official Edward O’Donnell. It centers on a program called the “High Speed Swim Lane” — also called “HSSL” or “Hustle” — which government attorneys claim Countrywide launched in 2007 as mortgage delinquency and default rates started increasing and Fannie and Freddie imposed stricter underwriting rules.
Countrywide sought actively to rationalize its loan sourcing drive through the program, removing loan quality checklists and compensating workers based only on the quantity of loans they originated, according to the lawsuit.
The effect was “extensive cases of fraud and other grave loan deficiencies,” particularly in the mortgages sold to Fannie and Freddie, in spite of guarantees that Countrywide had tightened underwriting guidelines, the Justice Department stated.
The process was supervised by Rebecca Mairone, a former chief operating officer of Countrywide’ s Full Spectrum Lending Division. She was included by the Justice Department as a co-defendant in January.
Mairone had left Bank of America in mid-2012 and has since then become a managing director at JPMorgan Chase & Co.
Marc Mukasey, legal counsellor for Mairone at Bracewell & Giuliani, stated in an email that it was “a shame the government wastes time and money on a lawsuit that is totally bereft of merit.”
Fannie and Freddie’s evaluated “total loss” on loans in the Countrywide program was $848.2 million, based on the filed legal documents. The “net loss” — the loss covered by the part of loans the Justice Department says were substantially deficient – was only $131.2 million.
While the jury will decide if the bank is accountable, any legal consequences would be up to Rakoff, a judge popular for his decisions in financial crisis lawsuits.
In 2010, Rakoff rejected a $33 million settlement proposed for Bank of America and the U.S. Securities and Exchange Commission over allegations it did not properly divulge employee bonuses and financial losses at Merrill Lynch, which it acquired in the latter part of 2008.
The bank eventually acquiesced to a renewal of a settlement disbursing $150 million in an agreement Rakoff “hesitantly” approved. In November 2011, he rejected a $285 million settlement between the SEC and Citigroup Inc, challenging the established custom of settlements without admitting any wrongdoing.
In the “Hustle” lawsuit, Rakoff denied allegations against the bank under the False Claims Act; but permitted the case to proceed instead under a provision of the Financial Institutions Reform, Recovery and Enforcement Act, a 1989 federal decree passed after the savings-and-loan crisis.
The law, which allows a longer statute of limitations of 10 years, has become the foundation for many government civil cases filed over the financial crisis.
The case is titled U.S. ex rel. O’Donnell v. Bank of America Corp et al, U.S. District Court, Southern District of New York, No. 12-01422.