Bank of America will pay a $1.3 billion penalty

Mitchell Hartman Jul 31, 2014
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Bank of America will pay a $1.3 billion penalty

Mitchell Hartman Jul 31, 2014
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Federal judge Jed Rakoff has imposed a civil penalty of $1.3 billion on Bank of America. 

This is the first time a jury has found a bank — or an individual banker — guilty of mortgage fraud in the financial crisis. A former mid-level Countrywide executive, Rebecca Mairone, was found liable and fined $1 million. Bank of America did not say whether it will assist her in paying the penalty.

The ruling comes after a jury in October 2013 found the bank liable for risky mortgages that were deliberately misrepresented as safe and sound, and sold to government mortgage guarantors Fannie Mae and Freddie Mac. The mortgages were marketed by Countrywide Financial, which Bank of America purchased for $2.5 billion in 2008.

The fraud took place in 2007-2008 (before Bank of America’s acquisition of the troubled bank), during the run-up to the financial crisi – just as the housing market was crashing. The marketing plan for the risky mortgages had a name in Countrywide’s corner offices, says analyst Chris Whalen at Kroll Bond Rating Agency: It was called “the hustle.” That came from the acronym for “High Speed Swim Lane,” or HSSL.

“The hustle program was about selling as many loans as possible as fast as possible, regardless of the defects of those loans,” said Whalen.

In his ruling, Judge Rakoff said the program was “driven by a hunger for profits and oblivious to the harms thereby visited, not just on the immediate victims but also on the financial system as a whole.”

Bank of America has fought this case, asserting that it should not be held fully accountable, nor pay such a severe penalty, because it didn’t own Countrywide when the fraud and other shoddy mortgage practices occurred. Bank of America and several of the country’s largest banks were at the time being pressured by federal banking regulators to acquire institutions like Countrywide that were teetering on collapse, to prevent them from causing a cascade of panic and failure throughout the financial system.  

“I find it troubling that B of A is effectively being penalized for having done a public good, which was to acquire Countrywide so that it would not have otherwise failed,” said banking analyst Bert Ely. “We want to get rid of too-big-to-fail, but if you have large financial firms that are in trouble for whatever reason, who wants to buy them?”

Cleaning up Countrywide has cost BofA approximately $55 billion in legal settlements so far, more than 20 times what it paid for the bank. 

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