NEW YORK -- Federal prosecutors slapped Bank of America with a $1 billion-plus civil mortgage fraud lawsuit Wednesday, accusing the bank of engineering a scheme that defrauded federally-backed mortgage buyers Fannie Mae and Freddie Mac during the national financial crisis.
The complaint filed in U.S. District Court in New York accuses the bank of using a loan-origination program called the "Hustle" to process mortgage applications at high speed with little checking for fraud, misstatements or other wrongdoing.
Prosecutors charge the program, allegedly in operation from at least 2007 through 2009, was begun under Countrywide Financial and Countrywide Home Loans, and was continued by Bank of America when it bought Countrywide's operations in a controversial July 2008 acquisition.
The result, the suit alleges, was defective mortgage loans that defaulted after Bank of America sold them to Fannie and Freddie, causing more than $1 billion in losses and thousands of foreclosures, according to the 46-page complaint filed in Manhattan.
"Countrywide and Bank of America made disastrously bad loans and stuck taxpayers with the bill," said Manhattan U.S. Attorney Preet Bharara, who announced the lawsuit with Steve Linick, inspector general of the Federal Housing Finance Agency (FHFA), and Christy Romero, special inspector general of the Troubled Asset Relief Program (TARP).
"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," said Bharara. "These toxic products were then sold to the government sponsored enterprises as good loans."
Bank of America did not immediately respond to requests for comment on the lawsuit. The banks' share dropped after news of the lawsuit broke and finished the day down 6 cents to $9.30 Wednesday.
Citing internal Countrywide documents, prosecutors said the aim of "Hustle" -- officially HSSL, or High Speed Swim Lane -- was to have loans "move forward, never backward," and to remove "toll gates" that could slow the loan process.
"In lieu of underwriter review, Countrywide assigned critical underwriting tasks to loan processors who were previously considered unqualified even to answer borrower questions," the lawsuit charged.
The alleged scheme also contained a speed incentive. Employees involved in mortgage processing were awarded bonuses based on volume, eliminating previous metrics that helped calculate loan quality.
The lawsuit says Countrywide executives were aware of the problems. For example, a quality review in January 2008 showed that 57% of "Hustle" loans defaulted.
Instead of notifying Fannie and Freddie, Countrywide, the suit alleges, deliberately concealed the quality of the loans it sold to Bank of America. The suit says Countrywide even offered a bonus to quality-control workers who could "rebut" defaults found under review.
The lawsuit didn't give specifics, but accuses Countrywide, and later Bank of America, of selling "thousands" of "Hustle" loans to Fannie and Freddie.
Fannie and Freddie buy mortgages from banks, package them and then sell the packaged securities to investors. When Fannie and Freddie buy loans from banks, banks can make new loans to aspiring home owners. Fannie and Freddie, in addition to mortgages they issue, earn profits selling pooled loans of differing credit quality to institutional investors.
Fannie and Freddie guarantee loans that are packaged into securities sold to investors. But, according to this lawsuit, Fannie and Freddie also didn't review the mortgages before they were purchased from banks. The agencies relied on banks' statements asserting the loans met certain qualifications.
The case is the sixth filed in the past 18 months by the Manhattan U.S. Attorney's office against major banks over allegations of reckless mortgage practices that contributed to the financial crisis.
Meantime, a coalition of fair housing agencies has amended an earlier complaint against the nation's largest bank, accusing it of failing to maintain and market foreclosed homes in black and Latino neighborhoods.
The coalition evaluated more than 500 homes Bank of America owns in 13 cities and found significant disparities in how houses in predominately non-white neighborhoods were maintained and marketed compared with houses in mostly white neighborhoods.
Among the 22 properties the group evaluated in Indianapolis, those in black and Latino neighborhoods were more likely to have trash, overgrown grass and shrubs, broken doors and windows, damaged roofs, and other maintenance issues.
Not a single house in non-white neighborhoods had for-sale signs, the complaint says. About 27% of the homes in white communities had for-sale signs.
The complaint from the National Fair Housing Alliance and 10 local fair housing agencies was amended Tuesday with the U.S. Department of Housing and Urban Development's fair housing office to include homes in Indianapolis, Chicago and Milwaukee.
The earlier complaint included homes in Atlanta; Charleston, S.C.; Dallas; Dayton, Ohio; Grand Rapids, Mich.; Miami/Fort Lauderdale, Fla.; Oakland/Concord/Richmond, Calif.; Orlando, Fla.; Phoenix and the Washington, D.C., area.
Amy Nelson, executive director of the Fair Housing Center of Central Indiana, said many of the problems found in black and Latino communities, such as clogged gutters, could be easily fixed to prevent more serious problems, such as roof damage.
She also pointed out purchase price and assessments of homes under Bank of America's control have declined dramatically and that surrounding non-foreclosed homes are well maintained.
"It's illegal for Bank of America to provide far worse maintenance or repairs in communities of color," said Peter Romer-Friedman, an attorney representing the fair housing agencies. "There is simply no legal justification for failing to address these basic maintenance and marketing issues."
In a statement, Bank of America denied the allegations.
"Bank of America is committed to stabilizing and revitalizing communities that have been impacted by the economic downturn, foreclosures, and property abandonment," said Rick Simon, a B of A spokesman. "We actively address the needs of such communities through existing programs, partnerships with non-profits and governments and continued investment in innovative programs."