A federal judge has signaled that $1 million is too low of a penalty for those responsible for the Countrywide mortgage fraud debacle. At a hearing last week in a Manhattan federal court, Judge Jed S. Rakoff, declared that such a penalty would be a “windfall” for Bank of America, Corp., (“BofA”) the entity legally responsible for its now defunct subsidiary, Countrywide Financial Corp. (“Countrywide”). While he has not yet determined the penalty, Judge Rakoff stated, “[i]t would be a windfall to a perpetrator who made, hypothetically, $100 million, to just penalize them $1 million…[t]hat would have no deterrent effect at all.”
As reported earlier by Young Law Group, in October a jury unanimously found BofA and former Countrywide executive, Rebecca Mairone, liable for civil fraud after a lengthy trial focusing on the companies’ sale of junk mortgages leading up to the mortgage crisis of 2007 and 2008. Former Countrywide executive turned whistleblower, Edward O’Donnell, initially filed the case in federal court. The details of the case involve a program, internally deemed “Hustle,” wherein Countrywide eliminated substantive vetting of home loan recipients, but also pushed employees for higher loan volume by paying lucrative bonuses. Shortly before the economy collapsed, Countrywide sold over 30,000 risky mortgages, worth hundreds of millions of dollars, to Fannie Mae and Freddie Mac.
U.S. Attorney Preet Bharara of the Southern District of New York prosecuted the case using an under-utilized weapon in the fight against fraud, the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”). Like the False Claims Act, FIRREA has a whistleblower provision, which will likely ensure O’Donnell receives a percentage of the government’s total recovery. FIRREA makes it a crime to perpetrate fraud against a federally insured financial institution.
FIRREA generally sets the maximum penalty of $1.1 million, but gives the sentencing judge discretion if the defendant has caused losses or made gains in excess of this amount. The Department of Justice is seeking $848.2 million in fines and penalties, a figure it roughly equates with the financial damages sustained by the Fannie Mae and Freddie Mac. BofA argues that the losses suffered by Fannie and Freddie were a result of overall economic downturn and not any fraud on Countrywide’s part. Thus, the financial giant’s lawyers maintain that it should pay no penalty, or at maximum the general statutory cap of $1.1 million. Judge Rakoff’s statements in last week’s hearing, however, clearly indicate that he does not think the statutory cap binds his judgment and he believes BofA is liable for either gains it made as a result of its fraud, losses maintained by the government, or both. However, the total amount that Judge Rakoff will ultimately order BofA to pay is unclear at this time.