A massive $1.27 billion penalty that was imposed on Bank of America in 2014 over mortgage loans it sold to Fannie Mae and Freddie Mac has been overturned by an appeals court. Reuters reports:
The Justice Department claimed Countrywide, which Bank of America bought in July 2008, defrauded government-sponsored mortgage finance giants Fannie Mae and Freddie Mac by selling them thousands of toxic loans.
But U.S. Circuit Judge Richard Wesley said the evidence at most showed Countrywide breached contracts to sell Fannie and Freddie loans of a specified quality, but that no proof existed to show it intended to deceive the buyers when those contracts were executed.
As a result, he said, “the trial evidence fails to demonstrate the contemporaneous fraudulent intent necessary to prove a scheme to defraud through contractual promises.”
The case centered on a 9-month home loan program run by Countrywide, a mortgage company that was later bought out by Bank of America. The lone program was known as the “high speed swim lane” or “HSSL” and became known as “Hussle.” In 2013 a jury found Bank of America liable for the loans sold to Fannie and Freddie and in 2014 a judge set the $1.27 billion penalty.
In his 2014 , U.S. District Judge Jed Rakoff wrote, “While the HSSL process lasted only nine months, it was from start to finish the vehicle for a brazen fraud by the defendants, 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.” A Reuters story published at the time explained how judge Rakoff reached the figure of $1.27 billion:
The Charlotte, North Carolina-based bank’s liability was based on the $2.96 billion that Rakoff said Fannie Mae and Freddie Mac paid Countrywide for 17,611 suspect Hustle loans.
Rakoff said this was the appropriate standard under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA), which was adopted after the 1980s savings and loan scandal and the basis for Bank of America’s liability.
The $1.27 billion penalty reflected findings by a government expert that only some of the loans had material defects, while others were acceptable, Rakoff said.
The Wall Street Journal points out that the $1.27 billion was small compared to the settlement the company reached with the Justice Department:
The Hustle penalty was relatively small compared to other fines paid by the bank, but it was an important anecdote in the government’s arsenal in its push for bigger penalties against the banks over related charges. Three weeks after a judge set the Hustle penalty—which was higher than Bank of America had expected—the bank agreed to a $16.65 billion mortgage-securities settlement with the Justice Department.
That settlement was the largest amount ever paid to the government by a corporation.