July 30--A federal judge in New York ruled Wednesday that Bank of America should pay $1.27 billion in civil penalties after a jury found its Countrywide unit guilty of knowingly selling bad home loans to Fannie Mae and Freddie Mac.
The ruling comes nine months after the jury ruled against the Charlotte bank in the so-called "Hustle" case, which stemmed from a whistleblower lawsuit filed by a former Countrywide Financial Corp. executive.
The government claimed Countrywide's Hustle, or "high-speed swim lane," program resulted in thousands of fraudulent loans being sold to Fannie Mae and Freddie Mac and later defaulting. The suit, which dates to 2012, is the first civil fraud case brought by the Department of Justice over mortgage loans sold to Fannie or Freddie.
According to the government, the Hustle program handled loans at a high speed and without regard for quality.
In his 19-page ruling, the judge, Jed Rakoff, wrote that there was "ample" evidence of a "fraudulent scheme and fraudulent intent" at Countrywide.
Even as internal reports at Countrywide showed deteriorating loan quality and employees voiced concerns about the loans, the lender "doubled down" and "applied ever more pressure on loan specialists to ignore loan quality concerns," Rakoff wrote.
Bank of America, which bought Countywide in 2008, argued that it should not have to pay penalties in the case. The most it said it can be fined is $1.1 million under the Financial Institutions Reform, Recovery and Enforcement Act.
"We believe that this figure simply bears no relation to a limited Countrywide program that lasted several months and ended before Bank of America's acquisition of the company," Bank of America spokesman Lawrence Grayson said Wednesday.
"We're reviewing the ruling and will assess our appellate options," he said.
In its October ruling, the jury also found former Countrywide executive Rebecca Mairone liable for her role in the scheme to misrepresent the quality of the loans as higher than they actually were.
Rakoff said Wednesday that Mairone should pay a penalty of $1 million, $200,000 less than the maximum the government was seeking because the higher amount "would strain her resources to the limit."
In his ruling, Rakoff described Mairone, who worked in California for Countrywide, as a relatively new employee who "had to prove herself" and "most aggressively pushed forward the (Hustle) fraud and most scathingly denounced those who raised concerns."
In an email to the Observer, Marc Mukasey, attorney for Mairone, said he plans to "fight on to clear her name."
"We continue to maintain that Rebecca never intended to defraud anyone and never did defraud anyone," Mukasey wrote. "Unfortunately, more powerful people chose her as a scapegoat because they thought she was an easy target."
The lawsuit stemmed from Countrywide whistleblower Edward O'Donnell, who said an increasingly competitive mortgage market in the mid-2000s led the lender to create the Hustle program. The government later took over the case.
The government had sought a fine of $2.1 billion from the bank. Rakoff said Fannie Mae and Freddie Mac paid Countrywide $2.9 billion for the 17,611 Hustle loans. But he said he imposed a lower penalty based on testimony by a government expert that more than half of the loans were not "materially" defective.
Wednesday's ruling comes as Bank of America continues to negotiate with the government over a potential multibillion-dollar settlement involving mortgage-backed bonds, an accord that could be the bank's largest since the financial crisis. The two sides have disagreed over terms.
Bank of America shares rose 24 cents Wednesday, or 1.56 percent, closing at $15.58.
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