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Bank of America could face higher penalties in ‘Hustle’ suit

The U.S. government is seeking higher penalties against Bank of America, three months after a jury found its Countrywide unit guilty of knowingly selling bad home loans to Fannie Mae and Freddie Mac.

The government, which initially sought $864 million in the so-called “Hustle” case, in a court filing Wednesday requested the Charlotte-based bank be fined $2.1 billion. The larger amount is the gross revenue the bank made from the sale of the loans, according to the government’s calculations.

In October, a jury in the civil case found Countrywide Financial Corp. and former executive Rebecca Mairone guilty of fraud over defective mortgages generated in a process the government said handled loans at a fast pace and without regard for quality.

The government claims the “high-speed swim lane” business model – known as HSSL, or “Hustle” – resulted in thousands of fraudulent loans being sold to Fannie Mae and Freddie Mac and later defaulting.

The government’s initial penalty request was based on the gross loss to Fannie Mae and Freddie Mac from the default of the loans. The government said Wednesday that the court should use gross gain, instead of net gain, to set the maximum allowable penalty. A penalty based on net gain “could be regarded as simply a cost of doing business,” the government said.

The bank has argued it should not have to pay penalties in the case and has said the most it can be fined is $1.1 million under the Financial Institutions Reform, Recovery and Enforcement Act. The bank has also pointed out that the Hustle process ended before it acquired Countrywide in 2008.

“This claim bears no relation to the limited Countrywide program that lasted several months and ended before Bank of America’s acquisition of the company," bank spokesman Lawrence Grayson said Thursday. "We will present the relevant facts in a detailed response soon.”

The bank has said the government can’t prove that the losses to Freddie Mac and Fannie Mae were caused by Countrywide misrepresenting the quality of the loans, “as opposed to other factors such as the worldwide mortgage crisis.”

The case, which dates to 2012, stems from a whistle-blower lawsuit filed by former Countrywide executive Edward O’Donnell.

According to the government, Countrywide made “bad loans” it knowingly sold “to cheat Fannie Mae and Freddie Mac out of money.” Countrywide was not concerned with the loans’ quality, the government said, but instead was focused on speed and volume. Mairone, the government said, was the “driving force behind the new HSSL work flow.”

The Hustle case is among lingering litigation the second-largest U.S. bank by assets faces. The bank has paid billions of dollars to settle claims stemming from the mortgage crisis. At an investor conference in New York in November, CEO Brian Moynihan said the bank still has “work to do on litigation.”

Among the pending cases:

• The bank is waiting to learn whether a New York judge will approve a proposed $8.5 billion settlement involving investors in bonds backed by Countrywide loans.

• A trial has yet to begin for a case involving insurer American International Group. AIG has sued Bank of America, Merrill Lynch and Countrywide, claiming they misrepresented loans that went into mortgage-backed securities.

• A trial also has not begun in a lawsuit involving the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac. The agency sued Bank of America and some other banks, alleging misrepresentation on mortgage-backed securities that were sold to Fannie Mae and Freddie Mac and later went sour.

Todd Hagerman, an analyst with Sterne Agee & Leach, said Thursday that big banks have put “the bulk and the most sizable” financial-crisis litigation behind them. But the government “is still playing catch-up” in going after banks since the crisis.

“By no means are we finished as it relates to ongoing legal matters including large settlements,” he said.

Bank of America shares rose 1.5 percent Thursday to $16.93.

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