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Bank of America’s Countrywide Ordered to Pay $1.3 Billion

U.S. District Judge Jed Rakoff in Manhattan issued the civil penalty against the Charlotte, North Carolina-based bank today in the first mortgage-fraud case brought by the federal government to go to trial.

Countrywide and Rebecca Mairone, a former executive with the mortgage lender, were found liable by a jury in Manhattan federal court in October for selling thousands of bad loans to the two government-sponsored enterprises. Mairone was ordered to pay $1 million.

While Rakoff didn’t grant the government’s request for the maximum penalty of $2.1 billion, he concluded that Fannie and Freddie paid Countrywide nearly $3 billion for the HSSL loans. The judge reduced the penalty by 43 percent because experts for both sides said more than 57 percent of the loans were of “acceptable quality.”

Settlement Talks

Separately, Bank of America is nearing a settlement with the Justice Department after raising its proposed offer to resolve probes into its sale of mortgage-backed bonds, according to people familiar with the talks. Representatives of the bank were at the Justice Department today to discuss the terms, and an accord could be reached this week, said two people who asked not to be named because the negotiations are confidential. The amount of the settlement under discussion has ranged from $13 billion to $17 billion, one of the people said. The discussions include how much money will be paid in cash and how much in consumer relief.

During the Countrywide trial, the government argued Countrywide committed a “simple but brazen” fraud by misrepresenting risky loans processed in 2007 and 2008 through its “High Speed Swim Lane,” or HSSL, program as being of investment quality. The U.S. said Countrywide issued defective mortgages under the program, and then sold them to Fannie Mae (FNMA) and Freddie Mac.

“While the HSSL process lasted only nine months, it was from start to finish the vehicle for a brazen fraud by the defendants, driven by hunger for profits and oblivious to the harms thereby visited, not just on the immediate victims but also on the financial system as a whole,” Rakoff wrote.
Considering Options

Bank of America said through a spokesman that it was considering its options to challenging Rakoff’s ruling.

“This figure simply bears no relation to a limited Countrywide program that lasted several months and ended before Bank of America’s acquisition of the company,” Lawrence Grayson, a spokesman for bank, said in an interview.

The case was the first by federal prosecutors alleging a bank violated a civil fraud statute enacted during the savings-and-loan crisis of the 1980s. The Bank of America unit had argued it should have to pay nothing.

Countrywide Financial Corp., 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. Bank of America acquired Countrywide in 2008.

Benching Underwriters

The government argued 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.

Brendan Sullivan, a lawyer for Countrywide, argued during the trial that while the loans were faulty, the bank created the process to speed up approval of prime loans after shifting its focus from subprime loans.

“Judge Rakoff imposed stiff penalties in a case brought by this office to punish and deter the fraudulent and reckless lending activities of a financial institution leading up to the financial crisis in 2008,” Manhattan U.S. Attorney Preet Bharara, whose office litigated the case, said in a statement.

“Throughout a yearlong litigation and monthlong trial, Bank of America claimed that the government had no case,” Bharara said. “After the jury said otherwise, Bank of America claimed that it should pay no penalty at all, arguing that the victims were not harmed and that the bank did not profit from this massive fraud. Judge Rakoff’s opinion squarely and emphatically rejects the bank’s claims.”


The government case began in 2012, when Bharara’s office joined a whistle-blower action against Bank of America filed by former Countrywide executive Edward O’Donnell.

“It bears mentioning that by virtue of this fraud the bank defendants managed to unload a vast portfolio of risky assets on unwitting buyers and were thereby able to reduce the risk on their own balance sheet at a crucial moment in time,” Rakoff said in today’s ruling. “Indeed Countrywide’s introduction of the HSSL program coincided with a severe contraction of the market for riskier mortgages and Countrywide’s understanding that it would no longer find unwilling buyers for the subprime mortgages.”

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