Christy L. Romero, the Special Inspector General for the Troubled Asset Relief Program (SIGTARP); Preet Bharara, the United States Attorney for the Southern District of New York; and Steve A. Linick, the Inspector General of the Federal Housing Finance Agency (FHFA) have announced that the U.S. has filed a civil mortgage fraud lawsuit against Bank of America Corporation and its predecessors Countrywide Financial Corporation and Countrywide Home Loans Inc. 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 Fannie Mae and Freddie Mac. Specifically, the complaint alleges that from at least 2007-2009, 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 control (QC) checkpoints, and which generated thousands of fraudulent and otherwise defective residential mortgage loans sold to Fannie and Freddie that later defaulted, causing $1 billion-plus in losses and foreclosures.
This is the first civil fraud suit brought by the U.S. Department of Justice (DOJ) concerning mortgage loans sold to Fannie Mae or Freddie Mac.
“The complaint 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," said Romero. "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.”
Countrywide initiated the "Hustle" or "High-Speed Swim Lane (HSSL)” 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 QC “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, 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 necessary 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 QC 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 percent, and a defect rate of nearly 70 percent 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, postclosing quality reviews showed defect rates of approximately 37 percent, far above the industry standard defect rate of four to five percent.
Instead of notifying the GSEs 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 QC personnel to “rebut” the defect rates found by corporate quality control. For example, an “unreasonable stated-income” finding could be reversed if corporate QC could not prove that the stated income was actually false. After this “rebuttal” process, the final defect rate was revised down to 13 percent. 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 the GSEs. 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, the GSEs 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 GSE stock. As of Dec. 31, 2011, the Treasury had provided $183 billion in funding to the GSEs through stock purchases.
Bank of America received $15 billion in federal funds through TARP on Oct. 28, 2008; an additional $10 billion on Jan. 9, 2009; and $20 billion on Jan. 16, 2009. Bank of America repaid taxpayers’ combined $45 billion TARP investment in full on Dec. 9, 2009.
