The purchase of Countrywide Financial in the throes of the Great Recession continues to haunt Bank of America (NYSE:BAC), as it now faces a nearly $1.3 billion fine stemming from a Countrywide lending program “hustle.”
U.S. District Judge Jed Rankoff, of the Southern District of New York, on Wednesday ordered Bank of America to pay $1.27 billion in penalties for a fraud case Countrywide carried out from August 2007 to May 2008—the latest in a series of fines and settlements the bank has paid relating to its purchase of the subprime lender in 2008.
Known as the “High Speed Swim Lane,” or “Hustle,” the program was the vehicle through which Countrywide perpetrated “a scheme to induce Fannie Mae and/or Freddie Mac to purchase mortgage loans originated through the High Speed Swim Lane (HSSL) by misrepresenting that the loans were of higher quality than they were,” stated court documents filed this week with the U.S. District Court for the Southern District of New York.
Countrywide implemented the scheme by transferring primary responsibility for approving loans from “quality-focused” underwriters to “volume-focused” loan specialists employing automated underwriting software; eliminating the quality-assurance checklist; suspending the “quality of grade” compensation reduction that previously provided disincentives to low-quality loan origination; and reducing the “turn time” for loan funding from 45-60 days to 15 days, the documents noted.
The penalty ordered by Rankoff is based on the amount that Countrywide induced Fannie and Freddie to pay for misrepresenting loans, according to a statement from Manhattan U.S. Attorney Preet Bharara.
“Today, Judge Rankoff 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,” Bharara stated.
Throughout a year-long litigation and after a month-long trial, a jury decided in October 2013 that Countrywide and one of its former executives, Rebecca Mairone, were responsible for the company’s selling of bad loans to Fannie and Freddie.
Mairone, who was formerly chief operating officer of the Full Spectrum Lending division of Countrywide, was ordered by Judge Rankoff to pay a civil penalty of $1 million.
Her legal counsel, however, argues that Mairone did not act alone and is merely a scapegoat for the actions, which he said were taken in consultation with her division’s CEO and Chief Credit Officer.
Despite the claim, the fact that other, higher-level individuals may have also been involved does not significantly lessen Mairone’s culpability for her leading role in the fraud, Rankoff stated in the case filing.
“The HSSL process was, from start to finish, the vehicle for a brazen fraud by the defendants, driven by the 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,” he wrote.
In accordance with the judgment, the court ordered Bank of America to pay the estimated $1.3 billion penalty no later than September 2.
Mairone is directed to pay the government quarterly payments of at least 20% of her gross income for the next three months, beginning with the quarter ending September 30, 2014 and continuing until she has paid a total of $1 million.
Written by Jason Oliva