In October, a federal jury found Bank of America (NYSE:BAC) unit Countrywide liable for damages related to the sale of thousands of toxic mortgages to the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corp. (Freddie Mac), two government-sponsored mortgage finance agencies. It was the first mortgage-fraud case brought by the U.S. government to make it to trial, and for those seeking justice in the wake of the late-2000s financial crisis, it was a success.
The case dealt specifically with a mortgage origination program called the “Hustle” — High Speed Swim Lane, HSSL — that Manhattan U.S. District Attorney Preet Bharara, whose office brought the case against Bank of America, said “treated quality control and underwriting as a joke.”
In the case report, the plaintiffs describe the program: “In order to increase the speed at which it originated and sold loans to the GSEs, Countrywide eliminated every significant checkpoint on loan quality and compensated its employees solely based on the volume of loans originated, leading to rampant instances of fraud and other serious loan defects, all while Countrywide was informing the GSEs that it had tightened its underwriting guidelines. When the loans predictably defaulted, the GSEs incurred more than a billion dollars in unreimbursed losses.”
Initial damages of about $850 million were determined using the losses of Fannie Mae and Freddie Mac as a starting point, but on Wednesday night, the government changed the way it wants to determine the penalty. Instead of using losses sustained by the mortgage finance companies, it wants to use the gross gain made by Countrywide as a result of the program.
It’s worth noting that some of the framework for the government’s case against Bank of America has been built on an interpretation of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989. For a period, it was unclear exactly how plaintiffs would seek civil penalties against the bank, but U.S. District Judge Jed Rakoff, who has worked his way into infamy as one of the top judges involving cases against major Wall Street firms, recently announced that a “straightforward application of the plain words” of FIRREA allowed Bharara and the Justice Department to bring a case against Bank of America and others related to toxic mortgages sold during the financial crisis, according to Reuters.
The government’s case against Bank of America argues that a process to streamline the sale of loans to often unqualified people pretty much amounts to criminal neglect. FIRREA states that the government can prosecute firms that commit fraud against federally insured deposit institutions. The significant part of the interpretation of the act is that the government may prosecute Bank of America for hurting itself as an FDIC-insured firm. This means that the government can seek civil penalties against Bank of America because it committed fraud against itself by selling toxic mortgages to Fannie Mae and Freddie Mac, an act that it paid billions of dollars to resolve.