Bank of America- Jury Weighs In

Posted by kevin on October 28, 2013 under Foreclosure Blog | Comments are off for this article

This past week, a jury in Manhattan found Bank of America (BOA) liable for mortgage fraud. BOA, as successor to the infamous Countrywide Home Loans, was found to have fudged its system for detecting bad loans which were sold to investors. They even had a name for the scheme- High Speed Swim Lane- acronmym “Hustle”. 57% of the Swim Lane loans defaulted, and the government claimed that 43% of the loans were defective or fraudulent. In addition, the jury found Rebecca Mairone, who oversaw the program, liable. Just an aside- when you call a loan program “Hustle”, I think that you are flirting with danger.

Now, these loans were originally Countrywide Loans which were sold to investors through Fannie and Freddie. BOA bought Countrywide in 2008 for $2.5 billion. The Hustle program ended just prior to the purchase. The case is entitled US ex rel O’Donnell v. BOA, et al because the case stems from a whistleblower action brought by former Countrywide executive, Edward O”Donnell. The penalty phase of the case will be going forward. The government is looking for a shade under $1 billion in damages. Because fraud is involved, the Judge could tack on punitive damages and fees.

This case is significant for two reasons: first, we are talking about a jury verdict. What we commonly see is a settlement usually way before trial to reduce costs to the bank and , more importantly, with no admission on the part of the bank of liability or wrongdoing. Second, the verdict is against the bank and an executive. It puts a face on the wrongdoing. Moreover, it will have a strong chilling effect on bank executives who are actively involved in hustling the public and even those that just look the other way when wrongdoing is rampant.

The case was brought under the FIRREAA. This was a statute that was promulgated during the Savings & Loan crisis of the late 80’s and early 90’s. The benefit is that the statute of limitations is 10 years. BOA may take the case up on appeal to challenge the applicability of that statute more so to attack the long statute of limitations.

Clearly, a victory for the investors and possible all consumers since we have a jury verdict on fraud. How NJ judges will consider this fraud when dealing with borrowers is another question. Borrowers and investors are two sides of the same coin. If borrowers did not get the predatory and often fraudulent loans, investors would not be sold those same loans. It is rather incongruous that courts blame the banks for the loans vis-a-vis the investors, but blame the borrowers for taking the bad loans as opposed to the originating lenders for granting them.