Earlier this week, the United States Department of Justice filed a lawsuit against Bank of America alleging mortgage fraud.  The lawsuit is based on the activities of Countrywide Financial Corporation and Countrywide Home Loans, both of which were acquired by Bank of America.  The lawsuit alleges that Countrywide sought to defraud Freddie Mac and Fannie Mae in connection with a new loan origination process, the Hustle, that Countrywide used between 2007 and 2009 for its residential mortgage business.

According to the lawsuit, through the Hustle process, “Countrywide eliminated every significant checkpoint on loan quality and compensated its employees solely based on the volume of loans originated, leading to rampant instances of fraud and other serious loan defects.”  When the loans defaulted, Freddie Mac and Fannie Mae were left with billions of dollars in losses.

The Hustle process also “eliminated underwriter review even from many high risk loans,” “eliminated previously mandatory checklists,” and meant that “instructions on proper underwriting were considered nothing more than unnecessary forms that would slow the swim lane down.”

The lawsuit also claims that the financial fraud was exacerbated when Countrywide, and then Bank of America, refused to repurchase the loans after Freddie Mac and Fannie Mae uncovered the loan defects.

The case is being handled by the United States Attorney’s Office for the Southern District of New York.  According to a press release issued by the office, the lawsuit against Bank of America is the first civil fraud suit brought by the Department of Justice concerning mortgage loans sold to Fannie Mae or Freddie Mac.  The press release quotes U.S. Attorney, Preet Bharara, as saying:

For the sixth time in less than 18 months, this Office has been compelled to sue a major U.S. bank for reckless mortgage practices in the lead-up to the financial crisis.  The fraudulent conduct alleged in today’s complaint was spectacularly brazen in scope.  As alleged, through a program aptly named ‘the Hustle,’ Countrywide and Bank of America made disastrously bad loans and stuck taxpayers with the bill.  As described, Countrywide and Bank of America systematically removed every check in favor of its own balance – they cast aside underwriters, eliminated quality controls, incentivized unqualified personnel to cut corners, and concealed the resulting defects.  These toxic products were then sold to the government sponsored enterprises as good loans. This lawsuit should send another clear message that reckless lending practices will not be tolerated.

For additional news, visit U.S. Accuses Bank of America of a “Brazen” Mortgage Fraud, Bank of America Sued by U.S. Over Mortgage Loan Sales, and Bank of America’s Mortgage Troubles Just Got $1 Billion Worse With New Fed Suit.