A U.S. District Judge Jed S. Rakoff ordered Bank of America to pay a significant civil penalty of $1.27 billion for fraud related to poor quality mortgages sold by Countrywide Financial Corporation, which Bank of America acquired in July 2008.
The court ruled that Bank of America should pay for the fraud that countrywide committed before and during the time taxpayers invested $45 billion in the bank through the Troubled Asset Relief Program (TARP). In addition, the court ordered former Bank of America executive Rebecca Mairone to pay a civil penalty of $1 million to the government. The investigation was carried out by the office of the Special Inspector General for TARP (SIGTARP), a federal law enforcement agency that investigates crime related to TARP funds.
“Bank of America’s mortgage fraud, uncovered and investigated by SIGTARP and its law enforcement partners, was brazen, but simple,” said Christy Romero, Special Inspector General for SIGTARP. Starting in 2007 and continuing as the mortgage crisis worsened up to 2009, Bank of America developed a program known as the “Hustle,” which stood for “High Speed Swim Lane” or “HSSL.” As its name implies, the lending program focused on generating and selling a high volume of mortgages at high speed to the GSEs.
“To do so, Bank of America removed critical quality control checks and fraud prevention measures that could have slowed down the origination process, despite repeated warnings that doing so would yield disastrous results, including defaults on the loans,” Romero said.
Through the Hustle program, Bank of America originated thousands of poor quality loans and sold them to the GSEs based on lies that the loans were investment quality and met the GSEs’ requirements, cheating the GSEs out of money in the process, according to Romero. As a result, Bank of America fraudulently added billions of dollars to its bottom line and paid executives bonuses based on the speed and volume of the defective GSE loans they processed.
“Although Bank of America received $45 billion in TARP funds, American taxpayers’ hard-earned tax dollars and TARP investments were not intended to support mortgage fraud. All TARP-related crime is unacceptable,” Romero said.
As originally reported by Reuters, the recent Bank of America’s penalty was below the $2.1 billion sought by the U.S. Department of Justice. However, it marks another legal defeat for Bank of America related to its purchase of Countrywide, which has cost the bank billions in dollars in litigation, loan buybacks, and write-downs.
Bank of America has also held talks on another, potential multi-billion dollar settlement to resolve separate government probes into questionable mortgage securities, including from Countrywide and its Merrill Lynch unit, according to Reuters.
Bank of America contends that no penalty was justified. “The $1.27 billion penalty award simply bears no relation to the limited Countrywide program that lasted several months,” Bank of America spokesman Larry Grayson said on Wednesday. “An appeal is possible.”