Feds Give Up Trying To Hold Bank Of America Accountable For Countrywide’s “Hustle” Mortgage Scam

Image courtesy of (frankieleon)

A nasty four-year legal battle between the Justice Department and Bank of America over a massive mortgage-related scam run by Countrywide Financial has come to a whimpering conclusion, with the DOJ opting to not appeal its most recent defeat in the case.

Let’s take a quick spin back a decade to the final years of the adjustable-rate mortgage boom, when shady mortgage lenders — Countrywide being the most prominent — were writing home loans to applicants who would likely be unable to keep up with the payments, and then reselling those poorly underwritten loans to Fannie Mae and Freddie Mac without disclosing that they might as well have been signed by kittens using invisible ink.

Countrywide had a name for this process — the High Speed Swim Lane (HSSL or “Hustle”) — that deliberately removed many of the underwriting roadblocks intended to prevent lenders from writing toxic loans, and resulted in Fannie and Freddie buying billions of dollars in loans from the company.

As you probably heard, many of those mortgages went into default, Countrywide failed and Bank of America snatched it up for a song. The Countrywide executive — the former Rebecca Mairone — went on to snag a nice job at JPMorgan Chase running, of all things, the bank’s foreclosure review division.

In Oct. 2012, the DOJ sued both Bank of America and Mairone, alleging violations of the False Claims Act by making fraudulent claims for payment to government officials, and the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA), a law that grew out of the savings and loan scandal in the late ’80s and involves the making of false statements to a federally insured financial institution.

In Aug. 2013, the court dismissed the False Claims allegations because the Hustle scam had ended before federal government bailed out Fannie and Freddie. However, the FIRREA case was allowed to proceed, and in Oct. 2013 a federal jury found BofA liable.

It took around eight months, but in July 2014, the court finally reached a financial penalty of around $1.2 billion. Case settled, right?

Nope.

BofA appealed to the Second Circuit, and in May 2016 the appeals panel sided with the bank and Mairone, finding that the “proof at trial is insufficient under the mail and wire fraud statutes as a matter of law.”

The appeals court accepted BofA’s argument that Countrywide did not commit fraud, even if it intentionally breached its contracts with Fannie and Freddie by selling them a bunch of worthless loans.

The central issue was when Countrywide intended to breach those contracts. If you accept that Countrywide entered into its Freddie and Fannie contracts honestly and did not immediately start reselling toxic mortgages, BofA claimed that no fraud existed. To count as fraud, argued the bank, Countrywide would have had to enter into those contracts knowing from the get-go that it was not going to abide by the agreement.

“A breach of contract does not amount to mail fraud,” explained the appeals court, citing one of its earlier decisions. “Failure to comply with a contractual obligation is only fraudulent when the promisor never intended to honor the contract.”

The DOJ did ask for a rehearing by the appeals panel, but that request was shot down in July. The deadline for the government to appeal to the U.S. Supreme Court came and went on Nov. 21, meaning BofA and Mairone will not be held accountable.

“We won. It’s over. Justice is done,” her attorney — who might want to explain his definition for “justice” to people who lost their houses in the recession — tells the Wall Street Journal.