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