WASHINGTON – A federal jury in Manhattan on Wednesday found Bank of America liable for fraud because of thousands of defective mortgages sold by its Countrywide Financial unit, handing the government a victory in one of the few major trials rooted in the financial crisis.
Government efforts to hold Wall Street accountable for crisis-era sins have primarily been resolved through settlements, leading to criticism that financial firms were given an easy way out, albeit an expensive one. Taking the BoA case to trial and winning the judgment could start to change that perception.
On Wednesday, after a four-week trial, a jury of four men and six women said BoA and former Countrywide executive Rebecca Mairone were liable for one count of civil fraud.
Prosecutors accused the bank and Countrywide of stripping safeguards designed to catch mortgage fraud and then peddling the loans to government-backed Fannie Mae and Freddie Mac. The mortgage finance twins were on the hook for more than $1 billion in losses once the housing market crashed, according to the complaint.
The Justice Department wants BoA to pay up to $848.2 million, the gross loss that it claims Freddie Mae and Freddie Mac suffered on the loans. U.S. District Judge Jed Rakoff must decide on the penalty.
BoA spokesman Lawrence Grayson said the company “will evaluate our options for appeal.” He noted that the scope of the case was narrowed before trial.
The court threw out charges that the bank violated the False Claims Act, which would have enabled the Justice Department to seek triple the amount in damages. A judge also found that BoA did not continue Countrywide’s alleged misconduct when it purchased the lender in 2008.
“The jury’s decision concerned a single Countrywide program that lasted several months and ended before Bank of America’s acquisition of the company,” Grayson said.
According to the government’s complaint, Countrywide created a program in 2007 known as “Hustle,” designed to ramp up the production of home loans for sale.
Officials alleged that the bank’s executives not only stripped safeguards but awarded bonuses based on the volume of mortgages employees could issue. As a result, the “defect rates” were nine times higher than the industry norm. Yet Countrywide hid this from Fannie Mae and Freddie Mac.
Federal prosecutors learned of Countrywide’s actions through Edward O’Donnell, who served as head of underwriting at the firm. He said that he warned superiors the program was creating poor quality loans but that they ignored his concerns. O’Donnell could receive as much as $1.6 million as a reward for his whistle-blowing.
Using information from O’Donnell, Justice filed a complaint last October under a powerful 1980s law known as the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA). The law has a low burden of proof, strong subpoena power and a 10-year statute of limitations, twice as long as the usual limit for financial fraud cases.
In a ruling this year, Rakoff said Justice could apply the little-used statute in its case against BoA, a decision that legal experts say will usher in more fraud cases against banks. Prosecutors in the Southern District of New York have in the past two years used FIRREA as the basis of lawsuits against Wells Fargo, BNY Mellon and BoA.
Much of BoA’s legal woes are tied to its $2.5 billion purchase of Countrywide Financial in 2008, once one of the largest U.S. home lenders. Bank officials say it has paid $40 billion in mortgage litigation and repurchases of soured loans.
“In a rush to feed at the trough of easy mortgage money on the eve of the financial crisis, Bank of America purchased Countrywide, thinking it had gobbled up a cash cow. That profit, however, was built on fraud, as the jury unanimously found,” Manhattan U.S. Attorney Preet Bharara said in a statement.