An order yesterday by U.S. District Judge Jed Rakoff in New York clears the way for a trial on September 23 in a government lawsuit accusing Bank of America Corp. of fraud in the sale of billions of dollars of toxic mortgage loans to Fannie Mae and Freddie Mac. Judge Rakoff rejected the bank’s bid to dismiss the case.

The court ruled that there are “genuine factual disputes” that justify letting the case continue against the second-largest U.S. bank. Only a few prominent cases tied to the financial crisis have ever gone to trial.

Judge Rakoff to decide “scope” before trial

Rakoff also said he will decide before trial which specific legal theories he will allow the government to pursue. Presumably, he will announce that aspect of his decision within the next couple of weeks.

What he determines about what the proper scope of the trial should be of great interest to correspondent lenders who sold loans to Countrywide/BofA in the past, and who are now facing repurchase demands from that bank (or other investors) now. In fact, that “scope” ruling could be of great value to correspondents regardless of whether Rakoff allows few or many legal theories and claims to be pursued by the government.

If he rules that certain types if theories or claims cannot properly be pursued, then it stands to reason that correspondents should be able to defend themselves against similar claims by BofA by reminding the bank that those types of claims have been adjudicated to be legally impermissible by a prominent judge in this very prominent case.

Likewise, BofA cannot possibly suffer damages related to certain types of claims by the government if the government is not even allowed to pursue those claims at trial — therefore, any subsequent attempt by BofA to force correspondents to “make it whole” for supposed losses on such claims would be presumptively fraudulent.

On the flip side, if Rakoff allows a broad spectrum of types of claims to go to trial, correspondents should benefit from noting the lengths to which BofA goes to demonstrate that there was no problem whatsoever with the loans, underwriting practices, and loan programs in dispute.

All of BofA’s public protests about the quality and accuracy of the loan data and underwriting will be useful to quote back to the bank when it does a shameful about-face and demands that the third-party originators who sold it these loans should pay up for supposed “defects” related to loan file information and alleged poor underwriting.

Case Background

To recap the pertinent case background, the U.S. Department of Justice sued Bank of America last October, joining a whistleblower lawsuit originally brought by former Countrywide Financial Corp executive Edward O’Donnell.

It alleged that Countrywide, acquired by Bank of America in July 2008, caused more than $1 billion of taxpayer losses by selling defective home loans to Fannie Mae and Freddie Mac, the mortgage financiers seized by the government in September 2008.

The government said the loans went through a program called the “High Speed Swim Lane” – also known as “HSSL” and “Hustle” – that Countrywide devised in 2007 to speed up loan processing, even if it meant ignoring safeguards to help ensure that loans were sound and not tainted by fraud.

Bank of America, in court papers, countered that HSSL was a “legitimate and good-faith effort” to develop systems for making prime loans after the collapse of the subprime market.