In October of last year, the U.S. Department of Justice intervened in a whistleblower lawsuit against Bank of America related to toxic mortgages the banking giant sold to Fannie Mae and Freddie Mac. The bad mortgages cost taxpayers more than $1 billion through a fraudulent scheme started by Countrywide Financial Corporation. Bank of America acquired Countrywide in 2008.
Under Countrywide’s Hustle program, the mortgage application and approval process was streamlined to get to approval faster, but the changes meant that important anti-fraud protections were eliminated. Speeding up the approval process meant that Countrywide could more quickly sell off more loans to government sponsored entities, like Fannie Mae and Freddie Mac.
Countrywide incentivized this process by paying employees based on the number of loans processed. As part of the Hustle program, Countrywide eliminated compliance specialists whose job was to double-check that all loan conditions were satisfied prior to funding.
Countrywide’s own audits of these loans that would eventually end up on the books of Fannie Mae and Freddie Mac showed that 40 percent contained a material defect in certain months. The industry standard for defects at that time was four percent. All the while, however, Countrywide represented to Fannie Mae and Freddie Mac that the loans were investment quality.
The defective mortgages, originated under the Hustle program, are the subject of a False Claims Act lawsuit brought by former Countrywide employee Edward O’Donnell.
Bank of America has moved for dismissal of the whistleblower lawsuit, but the government is continuing to press the case. The U.S Department of Justice filed its response to the request for dismissal, asserting that the actions of Countrywide were so egregious that they went beyond a mere breach of contract and requesting the judge allow the case against Bank of America to proceed.
Source: Reuters News & Insights, “U.S. urges judge not to dismiss ‘Hustle’ case against BofA,” April 2, 2013