Manhattan U.S. Attorney Sues Bank Of America For Over $1 Billion For Multi-Year Mortgage Fraud Against Government Sponsored Entities Fannie Mae And Freddie Mac

Manhattan U.S. Attorney Sues Bank Of America For Over $1 Billion For Multi-Year Mortgage Fraud Against Government Sponsored Entities Fannie Mae And Freddie Mac

Wednesday, October 24, 2012

After Collapse of Subprime Lending Market in 2007, Countrywide Started Alleged Fraudulent Mortgage Origination Program Called the “Hustle” Designed to Sell Defective Loans to Fannie Mae and Freddie Mac

Bank of America Continued the “Hustle” After Acquiring Countrywide in 2008

Preet Bharara, the United States Attorney for the Southern District of New York, Steve A. Linick, the Inspector General of the Federal Housing Finance Agency (“FHFA”), and Christy L. Romero, the Special Inspector General for the Troubled Asset Relief Program (“SIGTARP”), announced today that the United States has filed a civil mortgage fraud lawsuit against BANK OF AMERICA CORPORATION (“BANK OF AMERICA”) and its predecessors Countrywide Financial Corporation and Countrywide Home Loans, Inc. (collectively, “COUNTRYWIDE”). The Government’s Complaint seeks damages and civil penalties under the False Claims Act and the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”) for engaging in a scheme to defraud the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”). Specifically, the Complaint alleges that from at least 2007 through 2009, COUNTRYWIDE, and later BANK OF AMERICA after acquiring COUNTRYWIDE in 2008, implemented a new loan origination process called the “Hustle,” which was intentionally designed to process loans at high speed and without quality checkpoints, and which generated thousands of fraudulent and otherwise defective residential mortgage loans sold to Fannie Mae and Freddie Mac that later defaulted, causing over $1 billion dollars in losses and countless foreclosures.

This is the first civil fraud suit brought by the Department of Justice concerning mortgage loans sold to Fannie Mae or Freddie Mac.

Manhattan U.S. Attorney Preet Bharara said: “For the sixth time in less than 18 months, this Office has been compelled to sue a major U.S. bank for reckless mortgage practices in the lead-up to the financial crisis. The fraudulent conduct alleged in today’s complaint was spectacularly brazen in scope. As alleged, through a program aptly named ‘the Hustle,’ Countrywide and Bank of America made disastrously bad loans and stuck taxpayers with the bill. As described, Countrywide and Bank of America systematically removed every check in favor of its own balance – they cast aside underwriters, eliminated quality controls, incentivized unqualified personnel to cut corners, and concealed the resulting defects. These toxic products were then sold to the government sponsored enterprises as good loans. This lawsuit should send another clear message that reckless lending practices will not be tolerated.”

FHFA Inspector General Steve A. Linick said: “To prevent fraud, conducting quality reviews and complying with underwriting standards are critical. Countrywide and Bank of America allegedly engaged in fraudulent behavior that contributed to the financial crisis, which ultimately falls on the shoulders of taxpayers. This type of conduct is reprehensible and we are proud to work with our law enforcement partners to hold all parties accountable.”

SIGTARP Special Inspector General Christy Romero said: “The complaint filed today alleges serious and significant misrepresentations that Bank of America made before and during the time taxpayers invested $45 billion in TARP funds in the bank. SIGTARP and its law enforcement partners will investigate allegations of wrongdoing by TARP recipients, particularly conduct that results in substantial losses to the government and taxpayers.”

The following allegations are based on the Complaint filed today in Manhattan Federal court:

For many years, COUNTRYWIDE, on its own and as part of BANK OF AMERICA, was the largest provider of residential mortgage loans to the Government-Sponsored Enterprises, Fannie Mae and Freddie Mac (collectively, the “GSEs”). The GSEs were chartered by Congress with a mission to provide liquidity, stability, and affordability to the United States housing and mortgage markets. As part of this mission, Fannie Mae and Freddie Mac purchase single-family residential mortgage loans from lenders, and pool them into mortgage-backed securities, which they sell to investors on the open market. The GSEs guarantee payments of principal and interest to investors in the event that any loan in a mortgage-backed security defaults.

Fannie Mae and Freddie Mac rely on the lenders’ representations and warranties that the loans they are delivering for sale comply in all respects with the standards outlined in the Fannie Mae and Freddie Mac selling guides and lender sales contracts, which set forth underwriting, documentation, quality control, and self-reporting requirements. Because Fannie Mae and Freddie Mac do not do a pre-purchase loan review, lender representations that they are underwriting and delivering investment-quality mortgages according to selling guides and contractual requirements are central to the GSEs’ purchase decisions.

Lender representations attest to the credit quality of their loans at the time of sale, the borrower’s ability to repay the loan, and the accuracy of the loan data provided. Among the most basic requirements of an investment-quality mortgage are that: (i) all required loan data is true, correct, and complete; and (ii) no fraud or material misrepresentation has been committed by any party to the loan. A lender must also represent and warrant that its quality control department implements various post-closing measures intended to detect problems with loan quality and fraud. Whenever a lender identifies a material breach of a selling warranty, it must self-report the loan to the GSE.

COUNTRYWIDE initiated the Hustle (or “HSSL,” for “High-Speed Swim Lane”) in 2007 through its Full Spectrum Lending Division, just as loan default rates were increasing throughout the country and the GSEs were tightening their loan purchasing requirements to reduce risk. According to internal COUNTRYWIDE documents, the goals of the Hustle were high speed and high volume, where loans “move forward, never backward” in the origination process. To accomplish these goals, the Hustle removed necessary quality control “toll gates” that could slow down the origination process. For example, the Hustle eliminated underwriters from loan production, even for many high-risk loans, such as stated income loans. Instead, the Hustle relied almost exclusively on unqualified and inexperienced clerks, called loan processors. Although loan processors had not been previously considered competent or knowledgeable enough to be permitted even to answer borrower questions, they were now required to perform critical underwriting duties. If a loan processor entered data from a loan file into an automated underwriting system called CLUES and received a rating that the loan had an acceptable risk of default (or “Accept” rating), no underwriter would ever see the loan. The Hustle also did away with compliance specialists, whose job it was to ensure that any loans that were approved with conditions had the conditions satisfied before closing. Although loan processors were at the time entrusted with much more responsibility, they were given much less guidance. For example, mandatory checklists for performing important underwriting tasks (such as evaluating an appraisal or assessing the reasonableness of stated income) were eliminated. Loan processors were also financially incentivized to put volume ahead of quality, as Full Spectrum Lending changed its compensation plan to provide bonuses based solely on loan volume. Reductions to compensation for poor loan quality were discontinued.

Full Spectrum Lending’s senior management was repeatedly warned that eliminating toll gates for quality control and fraud prevention, and expanding the authority of loan processors and compensating them based on volume without regard to quality, would yield disastrous results. For example, in January 2008, a pre-funding quality review showed an overall defect rate of 57%, and a defect rate of nearly 70% for stated income loans. Full Spectrum Lending senior management, however, made no changes to the Hustle, and instead restricted dissemination of the pre-funding review.

As the warnings about the Hustle went unheeded, COUNTRYWIDE and later BANK OF AMERICA knowingly originated loans with escalating levels of fraud and other serious defects and sold them to the GSEs. For example, with loan processors encouraged to put volume before quality, and no underwriters checking loan files that were accepted through CLUES, there was widespread falsification of CLUES data. Loan processors also had no incentive to ensure that conditions on loans were satisfied, resulting in a spike of closed loans with outstanding conditions or without critical documentation. By February 2008, post-closing quality reviews showed defect rates of approximately 37%, far above the industry standard defect rate of 4 to 5%.

Instead of notifying Fannie Mae and Freddie Mac that they had been purchasing large volumes of fraudulent and otherwise defective loans that did not meet GSE guidelines, COUNTRYWIDE concealed the defect rates and continued the Hustle. In addition, Full Spectrum Lending initiated a one-time bonus to its quality control personnel to “rebut” the defect rates found by corporate quality control. For example, an “unreasonable stated income” finding could be reversed if corporate quality control could not prove that the stated income was actually false. After this “rebuttal” process, the final defect rate was revised down to 13%. COUNTRYWIDE concealed this bonus plan from the GSEs as well.

In July 2008, BANK OF AMERICA acquired COUNTRYWIDE via a merger. After the merger, the Hustle continued unabated through 2009. At no time did BANK OF AMERICA take any steps to disclose the Hustle to Fannie Mae or Freddie Mac. Throughout the Hustle, COUNTRYWIDE and BANK OF AMERICA sold thousands of Hustle loans to the GSEs that they knew did not meet their representations and warranties of quality. And after the loans defaulted, BANK OF AMERICA has resisted buying many of them back, despite the presence of fraud, misrepresentation, and other obvious violations of GSE requirements.

In September 2008, as a result of massive losses from, among other things, the payment of guarantees to investors on loans that defaulted, Fannie Mae and Freddie Mac were placed in conservatorship under the FHFA pursuant to the Housing and Economic Recovery Act of 2008. Simultaneously with the creation of the conservatorships, the United States Treasury exercised its authority under this Act to purchase Fannie Mae and Freddie Mac stock. As of December 31, 2011, the Treasury had provided $183 billion in funding to Fannie Mae and Freddie Mac through stock purchases.

Bank of America received $15 billion in federal funds through the U.S. Department of the Treasury’s Troubled Asset Relief Program (TARP) on October 28, 2008; an additional $10 billion on January 9, 2009; and $20 billion on January 16, 2009. Bank of America repaid taxpayers’ combined $45 billion TARP investment in full on December 9, 2009.

* * *

The Complaint seeks civil penalties under FIRREA, as well as treble damages and penalties under the False Claims Act, for over $1 billion in losses suffered by Fannie Mae and Freddie Mac for defaulted loans fraudulently sold by COUNTRYWIDE and BANK OF AMERICA.

The case is being handled by the Office’s Civil Frauds Unit. Mr. Bharara established the Civil Frauds Unit in March 2010 to bring renewed focus and additional resources to combating financial fraud, including mortgage fraud.

To date, the Office’s Civil Frauds Unit has brought five other civil fraud lawsuits against major lenders under the False Claims Act alleging reckless residential mortgage lending in connection with loans insured by the Federal Housing Administration. Three of the five cases have settled. On February 15, 2012, the Government settled its civil fraud lawsuit against CitiMortgage, Inc. for $158.3 million. On February 24, 2012, the Government settled its civil fraud suit against Flagstar Bank, F.S.B. for $132.8 million. On May 10, 2012, the Government settled its civil fraud suit against Deutsche Bank and MortgageIt for $202.3 million. The Government has also filed lawsuits against Wells Fargo, N.A., as well as against Allied Home Mortgage Corp. and two of its officers. Those cases remain pending. In each settlement, the defendants have admitted and accepted responsibility for certain conduct alleged in the Governments’ Complaint. The Office’s Civil Frauds Unit is handling these cases as part of its continuing investigation of reckless lending practices.

The Civil Frauds Unit works in coordination with President Barack Obama’s Financial Fraud Enforcement Task Force, on which Mr. Bharara serves as a Co-Chair of the Securities and Commodities Fraud Working Group. President Obama established the interagency Financial Fraud Enforcement Task Force to wage an aggressive, coordinated, and proactive effort to investigate and prosecute financial crimes. The task force includes representatives from a broad range of federal agencies, regulatory authorities, inspectors general, and state and local law enforcement who, working together, bring to bear a powerful array of criminal and civil enforcement resources. The task force is working to improve efforts across the federal executive branch, and with state and local partners, to investigate and prosecute significant financial crimes, ensure just and effective punishment for those who perpetrate financial crimes, combat discrimination in the lending and financial markets, and recover proceeds for victims of financial crimes.

Mr. Bharara thanked FHFA-OIG and SIGTARP for their extraordinary assistance in this case. He also expressed his appreciation for the support of the FHFA and the Commercial Litigation Branch of the U.S. Department of Justice’s Civil Division in Washington, D.C.

Assistant U.S. Attorneys Jaimie L. Nawaday and Pierre G. Armand are in charge of the case.


Copy of the complaint below…



U.S. v. Bank of America/Countrywide, et al. Complaint

10 Responses to “Manhattan U.S. Attorney Sues Bank Of America For Over $1 Billion For Multi-Year Mortgage Fraud Against Government Sponsored Entities Fannie Mae And Freddie Mac”
  1. hazel hager says:

    I am tears reading all this fraudulent action from BanK of America and Countrywide. I was one of those homeowners who were kick out of my home knowing it went foreclosure. We bought the house in 2005 and was never late in Mortagage.. In 2008 we try to refinance the loan in a fixed rate but the appraisal and home value was underwater. After two month and try to talked bank that raised my rate to 8 percent and not affordable for us. I was notified that our house foreclosed in 2012 I was contacted by bank of America that the foreclosure did not go through.. I had lof of things between that time I had to move to different places did not know my house was empty all this time. Because of this foreclosure I have to file BK because of my credit messed up I work in finances so I also this affected me to work in financial institution. I also got divorce because of the stress this had cause us it brought problems to our marriage. I am now back to my current home after representative of the bank US bank now it was sold by bank of America that I can go back and remodify my loan I am eligible.. especially my BK was discharge. Now I try to remodify the loan it was by Servicer called Select Portfolio now after giving all my information its now transferred to Nation Star mortgage who is sending me now that I owe the money since 2008 when I believed I was foreclosed . I did not profited or used my home for my self interest the house was empty all that time I had proof mortgage company did not sent me statement on what to pay my rate my loan amount etc. Also my mortgage tax statement. And utilities and home owners was just currently open or deactivated by me this year knowing and believing their marketing sales that I get the house in lower the appraisal value and the amount of payment I owe. Nation star mortgage had now sent me a statement I owe this 182000 interest from 2008 this was all added in my BK discharged in 2010 until now I don’t have any idea my mortgage payment or if they even looked at my remodification papers. Yes frustrating we should continue the litigation against this malpractice cause they only transfer the loan to servicer and really don’t help the consuners. I contacted the HOPE program hopefully they could be of help

    I hope to get information for those who are pursuing the litigation on this case to follow or have a case worker for each homeowners to deal with the remodification of loan.. plus they need to pay compensation with all the damage they did to us.. I believed its very dramatic but in my case I could say it almost cause me to break down. I don’t want to go to foreclosure again and BK I just want to live in the house we were before. I put a lot of downpayment on this house before it went down in value.
    .Please who ever wants to comment and see who is in the same situation as I am and got more help or result on this remodification and pursuant of this case please coment.. my email is

  2. my name is dawn i have bank of america they have been playing with me since 2007 sold my house without telling me had a lawyer got it back but they charged me 10,000 pluss fees that im still fighting to catch up and fell behind again and again they are trying the same thing

  3. mike and rebecca williams says:

    i have bank of america and im trying to pay my payments but sometime i dont have it all so ive been paying what i can.and now there not wanting to take parcell payments at least im trying to pay something.CAN YOU HELP MY PLEASE I DONT WANTA LOOSE MY HO– USE IVE GOT 3 GRANDSONS THAT I GOT CUSTIDY OF.TNX

    • Tracy says:

      Have they offered you a modification? You should be able to contact them about the HAMP modification – it requires that they modify your mortgage to 31% of your gross annual income. Also the consent judgment reached prior to this new complaint outlines, in the exhibits, what the banks have to take into consideration.

  4. Bill says:

    In 2006 Countrywide, Re-Max Excaliber, and Wells Fargo were working in concert in at least one scam in Arizona. I lost over $70,000. My “Place” was sold at a “Trustee” sale for $6,000 more than my original down payment in January, 2010. I became too weary to keep persuing this, but my Hope and Prayer is that this is all brought to Justice, whether I receive a dime or not.

    • Lynda says:

      I had a Countrywide mortgage that was assumed by B of A in 2008. I tried to short sale my Arizona home, but after 6 attempts and up to 120 days waiting for B of A to process offers, people walked! The 7th offer was rejected because B of A said I had more than enough time to process a short sale; they foreclosed on me within 1 week of their declining the last offer. Then I found that the 7th offer (that was rejected) bought the house under the foreclosure process for more than $200000 less than I paid! Countrywide paid an added commission to the loan officer AND my real estate agent. Also, I think I was discriminated against because I was a woman and over 60 years old! I lost my retirement housing investment, so have no idea what I will do when I officially retire. I do not agree that this is an election year ploy. I believe this is justice that needed to be served 4 years ago! I wish them well.

  5. daveleforge says:

    This is all political BS, let’s all give a hand to Obama. Try helping the true victims here instead of you fat cats. We (my wife and I) agreed to a settlement contract, entitling us to several items, including a little bit of money.The other party (BofA) failed to fulfill what we agreed to within the time frame alloted via the contract language, furthermore the other party (BofA) has not honored the terms of the contract including the little bit of payment due to us. The other party (BofA) tricked us into signing a stipulation of dismissal and submitted it into the Indiana court system, telling the judge they had settled all claims with us. We immediatly sent a letter to the courts letting them know they had been lied to, and followed it up with a Motion for sanctions. This was in June 2012 and you guessed it, no answer yet, and the case still shows dismissed. When does this become a breach of contract, and who holds these criminals accountable? Oh by the way the Magistrate Judge suggested our Attorney withdraw from us, and whala he disapeared. Simply amazing huh.

  6. aulstrue says:

    The injustice is staggering, immoral and illegal. Every victim should be made whole. At the first knowledge, a moratorium on ALL mortgages should have been enacted to protect homebuyers BECA– USE they do not have access to representation by million dollar lawyers to defend themselves and as such should have been represented by our ‘givernment regulators’ paid for by taxpayers. The financial institutions, even now, are not following through with modifications and are still getting away with it. These peoples’ VERY HOMES have been stolen and with all the other bankong fraud going on stole billions for taxpayers and destroyed the economy. Those who are well off are inconvenienced and still have not been charged criminally although it is commom knowledge that what they did was criminal and immoral. Where is justice? This has destroyed countless lives of families who were barely hanging on already due to the dirty, corrupt business government collusion to allow even essentials ( food, utilities, health care, etc.) To grow to outrageous amounts and allowing near momopolies on everything so no one has a choice. I won’t even go into the next business ‘racketeering’ that’s known as the insurance industry.
    Letting this all slide will only perpetuate the problem. Steal a stick of gum from the store, you go to jail. Rip off EVERYONE, keep your job and get a bonus.
    The ONLY way to try to fix this would be what Iceland is doing; the people must take the power back, forgive the debt. Those who participated need brough to justice. The people dealt with these entities in good faith. Institutions who engaged in fraud have no standing to collect. Absolve the debts, government take control, those responsible, no matter who or what position they are in, need fired and prosecuted. It should certainly be clear to everyone that big business cannot be trusted to make the rules even though even today they still scream about regulations. The good of those who cannot protect themselves is one of the most vital reasons for government and they continue to fail miserably.
    What will it take for justice? Should these issues be on the ballots for the people to have a voice? This is a critical time for our country and the world. Right now, a few very rich people are running everything for their OWN interests. It has to stop. If no justice is done and all this just slides, it will only get worse.
    Absolute power STILL corrupts ABSOLUTELY.

  7. Alabama John says:

    We must protect our taxpayers.

    Uh, Uh oh, I forgot the taxpayers are also the folks we foreclosed unlawfully on. Another thing to think about, they also vote.
    OK for the big boys to sue one another, but not OK for the homeowner to sue for the same reasons and hurt.
    Make sense? Not to me.

  8. bobbi swann says:

    Need the laughing mouse here! It probably won’t amount to much of nothing (all these lawsuits by the gov’t against the banking institutions) but it’s still a drain on their money flow paying for all those defense attorneys! This is an excellent invironment for attorneys despite the economic status!

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