The United States Department of Justice sued Bank of America today for more than $1 billion, accusing the company of deliberately generating substandard home loans and selling them to Fannie Mae and Freddie Mac.
From 2007 to 2009 under a scheme called “the Hustle,” Countrywide Bank – now owned by Bank of America – intentionally processed loans quickly without any quality assurances, U.S. Attorney Preet Bharara said. The shoddy loans were then quickly sold to Fannie Mae and Freddie Mac and most defaulted, causing Americans more than $1 billion in losses and countless foreclosures, he said.
According to the lawsuit, the Hustle started under Countrywide Bank and continued under Bank of America.
Lawsuit and Allegation Details
The civil mortgage-fraud lawsuit is the first brought by the Department of Justice concerning subprime mortgages sold to Fannie Mae and Freddie Mac. It seeks more than $1 billion in damages.
In the scheme, Countrywide and Bank of America are accused of eliminating quality controls and cutting corners to push through substandard loans. They were then sold off to government-sponsored Fannie Mae and Freddie Mac as good loans.
“This lawsuit should send another clear message that reckless lending practices will not be tolerated,” Bharara said.
According to the Justice Department, Freddie Mac and Fannie Mae rely on the lenders to represent the loans accurately to meet quality standards. The two entities do not perform any pre-purchase loan reviews and depend on the lenders themselves to deliver quality mortgages. Among the criteria that lenders must provide is that the loan data is true, correct and complete, that none of the materials are fraudulent or misrepresented, and that quality controls are in place to detect problems with loans.
Countrywide started the Hustle (also called High-Speed Swim Lane or HSSL) in 2007, just as default rates were going up, according to the lawsuit.
“According to internal Countrywide documents, the goals of the Hustle were high speed and high volume, where loans ‘move forward, never backward’ in the origination process,” the lawsuit said. To meet these goals, the lender removed quality controls that could impede the lending process.
The Hustle continued even after Bank of America acquired Countrywide in July 2008, the lawsuit alleged, and Bank of America did not disclose the shortened process to Fannie or Freddie. The practice ended in 2009, the lawsuit said.
Effects of the Hustle
In September 2008, Fannie Mae and Freddie Mac were placed into conservatorship because of the ongoing subprime mortgage crisis.
Steve A. Linick, the Inspector General of the Federal Housing Finance Agency, said Bank of America and Countrywide’s blatant neglect for underwriting standards contributed to the nation’s housing crisis.
“Countrywide and Bank of America allegedly engaged in fraudulent behavior that contributed to the financial crisis, which ultimately falls on the shoulders of taxpayers,” he said.
Bharara said that in the past year and a half, the U.S. Attorney’s office has been cracking down on reckless mortgage practices that led to the country’s housing market collapse.
“The fraudulent conduct alleged in today’s complaint was spectacularly brazen in scope,” he said. “As alleged, through a program aptly named ‘the Hustle,’ Countrywide and Bank of America made disastrously bad loans and stuck taxpayers with the bill.”