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May 1, 2013 Mortgage Fraud

False Claims Act Lawsuit Filed Against Bank of America for Mortgage Fraud

The United States government has filed a lawsuit against Bank of America, charging the institution with costing taxpayers over $1 billion by selling thousands of bogus mortgage loans to “government-sponsored enterprises” (GSEs) Fannie Mae and Freddie Mac.

Fannie and Freddie provide home mortgages, which they purchase from lenders who originated them. They hold on to some of these mortgages and some are securitized, meaning they are sold in the form of securities which the GSEs guarantee.

The mortgage fraud lawsuit, which was originally filed by a whistleblower, is the United States Department of Justice’s first civil fraud lawsuit to be pursued over mortgage loans that were sold to the big mortgage financiers.

Do the Hustle

According to the official court documents, in 2007, Bank of America joined in a scheme called “the Hustle.” Originated by Countrywide mortgage company, the Hustle was simply a sneaky way of speeding up the processing of residential home loans. Bank of America continued using the Hustle long after acquiring Countrywide in 2008.

The Hustle essentially did away with Bank of America’s quality control “toll gates,” which slowed down the loan origination process. For example, the Hustle eliminated underwriters from the loan process. This was even true for high-risk loans, like stated income loans. Instead of using underwriters, the Hustle led Bank of America to almost exclusively use unqualified and inexperienced clerks, known as loan processors. In the past, loan processors were not considered knowledgeable or experienced enough to even answer questions posed by borrowers. Thanks to the Hustle, they were now performing complex underwriting duties. So, if loan processors entered data from a loan file into an automated loan underwriting system and received an acceptable risk of default, then no underwriter would ever lay eyes on the loan. It was simply approved.

The Hustle also got rid of compliance specialists. The compliance specialists’ job was to ensure each loan that was approved with special conditions had those conditions met before the loan closed. In their absence, loan processors were also doing the job of a compliance specialist. For the sake of speed, Bank of America did away with the mandatory checklists for underwriting tasks. These checklists included things like evaluating appraisals and assessing stated incomes.

The Hustle also put in place a “quantity over quality” mentality, encouraging loan processors to engage in fraudulent activity and providing monetary incentives for approving high numbers of loans. In fact, compensation plans were changed to provide bonuses that were based only on the volume of approved loans. To make matters worse, compensation reductions for poor loan quality were discontinued.

The Hustle led to default rates that approached (and sometimes exceeded) 40 percent. That’s almost nine times the industry average. However, Countrywide did not disclose this information to Freddie Mac or Fannie Mae. They even handed out monetary bonuses to staff members to “rebut” any problems that were being found by the GSEs. Default rates and home foreclosures exploded, however Bank of America refused to buy back many of the bogus loans.

“The fraudulent conduct alleged in today’s complaint was spectacularly brazen in scope,” U.S. Attorney Preet Bharara said. “Countrywide and Bank of America made disastrously bad loans and stuck taxpayers with the bill.”

The Case Whistleblower

According to court documents, the False Claims Act lawsuit was originally filed by a whistleblower. The whistleblower, Edward O’Donnell, is a Pennsylvania resident and former executive vice president of Countrywide Home Loans. O’Donnell worked for Countrywide from 2003 to 2009.

According to O’Donnell’s False Claims Act complaint, supervisors at both Countrywide and Bank of America brushed aside his “numerous objections to the Hustle.” O’Donnell also claims that he became “one of the lone voices” within his division that objected to the increasing number of loan quality issues and default rates.

The government’s lawsuit seeks civil fines, as well as treble damages under the federal False Claims Act. Freddie Mac and Fannie Mae lost over $1 billion on defaulted loans that were sold by Countrywide and Bank of America from 2007 to 2009. In recent years, the DOJ has successfully used the False Claims Act several times to take on Wall Street corruption.

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