- POSTED: 31 Jul 2014 07:11
A US judge on Wednesday (July 30) ordered Bank of America to pay a US$1.3 billion penalty for selling bad loans to mortgage finance firms Fannie Mae and Freddie Mac amid the housing crisis.
NEW YORK: A US judge on Wednesday (July 30) ordered Bank of America to pay a US$1.3 billion penalty for selling bad loans to mortgage finance firms Fannie Mae and Freddie Mac amid the housing crisis.
The penalty comes after a New York jury in October 2013 found that Bank of America and Countrywide defrauded the two US mortgage giants in a lending programme in 2007. Bank of America bought Countrywide in 2008.
The programme was "from start to finish the vehicle for a brazen fraud by the defendants, driven by a 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," wrote US District Judge Jed Rakoff in the penalty order.
The US Justice Department alleged that Countrywide created the so-called "Hustle" programme in 2007 as government-backed Freddie and Fannie were tightening their underwriting guidelines and loan purchase requirements in response to rising mortgage defaults.
Countrywide allegedly eliminated key checkpoints on loan quality and compensated employees solely based on loan volumes, leading to "rampant instances of fraud" as Countrywide informed the loan-finance firms that it had tightened requirements, the Justice Department said in court papers.
While writing that the fraud "more than warrants" the US$1.3 billion penalty, Rakoff said Bank of America should not have to pay the full US$3 billion associated with the 17,611 Hustle-generated loans purchased by Freddie and Fannie.
The reason is that a "meaningful" number of the loans were of "acceptable quality," the judge said. He cited a US government expert who estimated that 57.2 per cent of the Hustle loans were not "materially defective." Rakoff also imposed a US$1 million penalty on Rebecca Mairone, a former Countrywide executive whom the jury found helped perpetrate the fraud.
The jury's decision and the subsequent penalty "make clear that mortgage fraud cannot be viewed as simply another cost of doing business in the financial world," said US Attorney Preet Bharara.
A Bank of America spokesman criticised Rakoff's order. "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. We're reviewing the ruling and will assess our appellate options."