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Judge rules mortgage fraud lawsuit against Bank of America can proceed

A federal judge says a lawsuit that accuses Bank of America of defrauding government-sponsored mortgage giants Fannie Mae and Freddie Mac can move ahead.

In October, the United States Attorney for the Southern District of New York filed a civil mortgage fraud lawsuit against the Charlotte-based bank and Countrywide Financial Corp., the subprime lender it acquired in July 2008. The government claims Countrywide ran a loan-origination program that resulted in more than $1 billion of taxpayer losses because of toxic home loans that were sold to Fannie Mae and Freddie Mac.

Under the so-called “Hustle” program, loans were processed at a high speed and without quality checkpoints, which led to thousands of “fraudulent” loans that were sold to Fannie and Freddie Mac and later defaulted, the government alleges.

Bank of America had sought summary judgment, which would mean no trial. But this week, U.S. District Judge Jed Rakoff in Manhattan ruled “that there remain genuine factual disputes” in the case, allowing it to move toward trial. The reasons for the ruling will be issued “in due course,” Rakoff wrote.

In an email Wednesday, Bank of America spokesman Lawrence Grayson said the Hustle program “ended before our purchase of Countrywide, as the government acknowledges. We believe there was no fraud.”

Bank of America’s purchase of Countrywide has already cost the nation’s second-largest lender by assets billions of dollars in settlements. In a separate case, pending in New York, 22 institutional investors are awaiting approval of a proposed $8.5 billion Bank of America settlement to resolve claims stemming from Countrywide loans.

The Hustle lawsuit was the first civil fraud case brought by the U.S. Department of Justice over mortgage loans sold to Fannie or Freddie.

It’s not the only mortgage-related case Bank of America is fighting. This month, the Justice Department and the Securities and Exchange Commission, in two lawsuits, said the bank defrauded investors who bought securities backed by prime mortgages that eventually soured and concealed information about the true risks of the loans. The bank has said that the securities were sold to “sophisticated” investors “who had ample access to the underlying data.”

Roberts: 704-358-5248; Twitter: @DeonERoberts
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