Bank of America should pay $2.1 billion for fraud

Investor Accord

Bank of America has agreed to pay $500 million to settle securities law claims by investors who said they were misled into buying Countrywide’s mortgage-backed securities. An $8.5 billion settlement with investors who claim Countrywide failed to repurchase defective mortgages pooled is waiting to be approved by a New York state judge.

Countrywide Financial Corp., based in Calabasas, California, was the biggest U.S. residential home lender before the collapse of the housing market, originating or purchasing about $1.4 trillion in mortgages from 2005 to 2007. The bulk of them were sold to investors as mortgage-backed securities. Bank of America acquired Countrywide in 2008.

Countrywide committed a “simple but brazen” fraud by misrepresenting risky loans processed in 2007 and 2008 through its “High Speed Swim Lane,” or HSSL, program as being of investment quality, the U.S. has said.

The case was brought under the Financial Institutions Reform, Recovery and Enforcement Act of 1989, or FIRREA. That statute and another law have been used by federal prosecutors in New York at least six times to obtain almost $500 million in mortgage fraud recoveries.

Under the statute, the penalty can’t exceed the amount of gain or loss from a violation.

Fannie Losses

Bank of America argued that the U.S. couldn’t prove that the scheme to misrepresent the quality of its HSSL loans caused losses to Fannie Mae and Freddie Mac.

“The government cannot show that any loss suffered by Fannie and Freddie in connection with the HSSL loans proximately resulted from a misrepresentation by Countrywide about the loans, as opposed to other factors such as the worldwide mortgage crisis,” the bank said in court papers.

Bank of America also claimed that the government’s calculated number of faulty loans, more than 28,882, was incorrect.

Countrywide earned at least $165 million using HSSL, allowing the company to maintain revenue in a “cratering” market for subprime mortgages, prosecutors told the jury in closing arguments.

The U.S. in 2012 joined the whistle-blower action against Bank of America filed by former Countrywide executive Edward O’Donnell.

The U.S. case is U.S. v. Countrywide Financial Corp., 12- cv-01422, U.S. District Court, Southern District of New York (Manhattan).

The FHFA case is Federal Housing Finance Agency v. Countrywide Financial Corp., 12-cv-01059; and the AIG case is American International Group Inc. v. Bank of America Corp, 11- cv-10549, both U.S. District Court, Central District of California (Los Angeles).

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