U.S. Department of Justice Scores Major Win Against Mortgage Fraud
This week the U.S. Department of Justice (“DOJ”) announced a significant victory in the fight against mortgage fraud. A federal jury in the Southern District of New York found Bank of America Corp. (“BofA”) and former Countrywide executive, Rebecca Mairone, liable for civil fraud after a lengthy trial focusing on the companies’ actions leading up to the financial crisis of 2008. BofA acquired Countrywide and assumed its liabilities just months before the financial collapse, from which the nation is still reeling. While U.S. District Court Judge Jed Rakoff will determine the ultimate penalty, the DOJ is seeking $848.2 million from the financial giant.
The suit, U.S. ex rel. O’Donnell v. Bank of America Corp, originated with a whistleblower, former Countrywide executive Edward O’Donnell, who provided inside information into the firm’s fraudulent home loan practices and surely proved invaluable to the case. The case surrounds a Countrywide program, known as the “High Speed Swim Lane,” or tellingly “Hustle” for short. Under “Hustle” Countrywide originated millions of dollars in shoddy home mortgages, which were subsequently sold to government operated Fannie Mae and Freddie Mac. At the time, Countrywide eliminated the substantive vetting of loan recipients, while simultaneously paying lucrative bonuses to employees to incentivize volume, a proverbial recipe for disaster. Not surprisingly, about forty-three percent of the loans issued under “Hustle” had material defects. After the economy collapsed, precipitating the federal government takeover of Fannie and Freddie, American taxpayers were left holding the bag.
To prosecute the case, DOJ utilized the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”), an often overlooked weapon in its arsenal. Among other provisions, FIRREA outlaws fraud against a federally insured financial institution. Similar to other federal laws that fight fraud, FIRREA has a whistleblower provision through which knowledgably insiders are entitled to a percentage of the government’s recovery.
In a rare move for a bank facing legitimate fraud allegations, BofA opted not to settle out of court, but defend the case at trial with a highly paid team of corporate defense lawyers. One must wonder whether it now regrets that decision, given an increasing climate of public hostility towards risky lending and investing practices. Seemingly indicating the DOJ’s unwillingness to balk at the prospect of facing off against financial giants in court, U.S. Attorney Preet Bharara in the Southern District of New York recently stated, “[t]his office will never hesitate to go to trial to expose fraudulent corporate conduct and to hold companies accountable, particularly when it has caused such harm to the public.”