Bank of America Liable for Mortgage “Hustle” Program

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For the first time, a major U.S. bank has been found liable for fraud in the sale of defective mortgages during the lead-up to the 2008 financial crisis.

On Wednesday, a federal jury in New York found Bank of America guilty of defrauding taxpayers in the sale of thousands of defective home loans from its Countrywide Financial unit to the government-backed mortgage giants Fannie Mae and Freddie Mac.

The civil suit centered on a lending program referred to within Countrywide as “the Hustle.” According to prosecutors, the program was designed to process mortgages at rapid speed without adequate checks on risk. Bankers were allegedly awarded bonuses based on how quickly they were able to originate loans. Countrywide earned $165 million on the program, but when the mortgages later soured, Fannie Mae and Freddie Mac were left with more than $1 billion in losses.

The jury of six women and four men also found a former Countrywide executive, Rebecca Mairone, liable for her role in leading the Hustle initiative. An attorney for Mairone, who now works for JPMorgan Chase, told The New York Times that his client “never engaged in any fraud because there was no fraud. We’ll fight on.”

Bank of America similarly denied any wrongdoing.

“The jury’s decision concerned a single Countrywide program that lasted several months and ended before Bank of America’s acquisition of the company,” a spokesman said in a statement. “We will evaluate our options for appeal.”

The verdict marked a major victory for the Justice Department, which has come under heavy criticism for its response to the financial crisis. As FRONTLINE reported in the January film The Untouchables, no senior Wall Street executive has faced criminal prosecution for fraud tied to the sale of bad mortgages.

In a statement, Preet Bharara, the United States attorney in Manhattan, lauded the jury’s decision.

“In a rush to feed at the trough of easy mortgage money on the eve of the financial crisis, Bank of America purchased Countrywide, thinking it had gobbled up a cash cow. That profit, however, was built on fraud, as the jury unanimously found,” said Bharara.

One factor in the jury’s decision appeared to be the testimony of former Countrywide employee John Boland. According to his testimony, loan specialists in the Hustle program were told they would not be allowed to go home for the night unless they approved a loan. Boland also testified that he found it “mind blowing” to learn that two employees who criticized the process were later fired. As one juror told Bloomberg News:

Boland’s testimony was shocking … Those employees were told to do “30 in 30,” or 30 loans in 30 days. I will say in my opinion the bank and these employees were just passing off unsatisfactory loans as prime loans and Fannie and Freddie got stuck.

To prosecute its case against Bank of America, the government turned to a little-known legal statute: The Financial Institutions Reform, Recovery, and Enforcement Act. FIRREA, as the statute is known, was passed in the wake of the savings and loan crisis as vehicle for prosecuting individuals who defrauded federally insured deposit institutions.

FIRREA allows the government to pursue civil charges for a range of violations typically addressed through criminal statute, including mail fraud, wire fraud and bank fraud. But unlike criminal cases, which require prosecutors to establish guilt beyond a reasonable doubt, FIRREA cases only require guilt be established by a preponderance of the evidence.

The government’s success in the Bank of America case may open FIRREA up to broader use in the future, particularly because it allows prosecutors to extend the typical statute of limitations in such cases from five years to 10.

U.S. District Judge Jed Rakoff, who presided over the trial, set a Dec. 5 hearing for arguments over how large a penalty Bank of America should pay. Prosecutors have asked for a fine of $848 million.

Rakoff has been a vocal critic of the government’s response to the financial crisis, and his past criticisms of that effort make it hard to to determine how he may rule. In 2011, for example, he rejected a $285 million settlement between the SEC and Citigroup, in part due to the agreement’s neither-admit-nor-deny clause. In his decision, Rakoff wrote that he could not determine whether the settlement was fair because without an admission of wrongdoing, he had no way to assess the bank’s true liability. Issuing a ruling “on the basis of allegations unsupported by any proven or acknowledged facts whatsoever, is neither reasonable, nor fair, nor adequate, nor in the public interest,” he wrote.

Depending on the final size of the penalty, the verdict could help bolster the government’s position as it pursues additional cases tied to the financial crisis. Today, for example, The Financial Times reported that at least nine banks are facing probes by a Justice Department task force into their sales of mortgage-backed securities. The New York Times also reported that federal authorities “are preparing to take action” in a criminal investigation of JPMorgan Chase for turning a blind eye to Bernard Madoff’s Ponzi scheme. And earlier this week, the Times reported on a tentative $13 billion deal between JPMorgan and the DOJ over the sale of troubled mortgage investments between 2005 and 2007.

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