NEW YORK — A U.S. appeals court on Monday overturned a jury’s finding that Bank of America Corp was liable for mortgage fraud leading up to the 2008 financial crisis, tossing a $1.27 billion penalty and dealing the U.S. Justice Department a major setback.
The 2nd U.S. Circuit Court of Appeals in New York ruled that the proof was insufficient under federal fraud statutes to establish liability in connection with a mortgage program called “Hustle” run by the former Countrywide Financial Corp.
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.”
Bank of America in a statement said it was pleased with the ruling. A spokesman for Manhattan U.S. Attorney Preet Bharara, whose office oversaw the lawsuit and took it to trial, had no immediate comment.
The lawsuit, which was filed in 2012 following a whistleblower’s complaint, was one of the highest-profile government enforcement actions to go to trial over events related to the U.S. housing meltdown.
A federal jury in 2013 found Bank of America and Rebecca Mairone, a former midlevel Countrywide executive, liable for fraudulently selling shoddy loans originated by its “High Speed Swim Lane” program, also called HSSL or Hustle.
The Justice Department contended the program rewarded staff for generating more mortgages and emphasizing speed over quality and resulted in Fannie Mae and Freddie Mac being lied to about the quality of loans they bought.
The government seized both companies during the financial crisis and put them into conservatorships.
Following the verdict, U.S. District Judge Jed Rakoff in 2014 imposed a $1.27 billion penalty onBank of America and ordered Mairone to pay $1 million.
The lawsuit was pursued under the Financial Institutions Reform, Recovery and Enforcement Act of 1989, a law adopted after the 1980s savings and loan scandal that the Justice Department has relied on for financial crisis-linked cases.
The case is U.S. v. Countrywide Home Loans Inc et at, 2nd U.S. Circuit Court of Appeals, No. 15-496.
NATE RAYMOND
JONATHAN STEMPEL
