A federal appeals court should not overturn a judge’s ruling that Bank of America pay $1.27 billion in penalties for defective mortgages sold in Countrywide Financial Corp.’s now-defunct “Hustle” program, the U.S. government says.
On Wednesday, the government filed its opposition to Bank of America’s appeal of the penalties the federal judge imposed on it last year in the three-year-old case. The Charlotte bank was ordered to pay the penalties after a jury in 2013 found Countrywide Financial liable for knowingly selling bad home loans to mortgage giants Fannie Mae and Freddie Mac.
In February, the judge who ruled the bank should pay the penalties, Jed Rakoff in Manhattan, denied the lender’s request to overturn the jury’s verdict. Bank of America, which has said the Hustle program ended before it bought Countrywide in 2008, appealed that decision in April.
Former Countrywide executive Rebecca Mairone, who was also found liable by the jury and ordered to pay a penalty of $1 million, is also appealing. Mairone was chief operating officer for the Countrywide division over the Hustle program.
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In its filing Wednesday, the government says evidence shows Countrywide committed fraud by selling thousands of “defective and risky” loans it misrepresented as “quality” investments.
Arguments by the bank and Mairone that they shouldn’t be held liable have no merit, the government says. In its argument supporting the fines, the government says they are allowed under a federal law authorizing it to seek civil penalties from whoever violates criminal fraud statutes in a way that “affects” financial institutions.
“As the evidence showed, Countrywide and Mairone committed just such frauds,” the government says.
Bank of America, in its April appeal, says the case was handled unfairly from “beginning to end” and the trial was “riddled with errors at both the liability and penalty phases.”
The bank says the case was allowed to go to trial despite a mismatch between the government’s allegations and the federal law it used in the case. Also, allegations in the case consist exclusively of breaches of contract and, therefore, could not give rise to fraud claims, the bank says.
Bank of America has also said that the federal law the government used in the case allows a civil penalty of no more than $1.1 million “as a general rule.”
The Hustle case marked the first civil fraud case brought by the Department of Justice over mortgage loans sold to Fannie Mae or Freddie Mac. The lawsuit originated from Countrywide whistleblower Edward O’Donnell.