By Dow Jones Business News, October 23, 2013, 04:08:00 PM EDT
By Shayndi Raice
Bank of America Corp. ( BAC ) committed fraud when it sold loans to mortgage finance firms Fannie Mae ( FNMA ) and Freddie
Mac ( FMCC ) in a scheme called the "hustle," a jury found Wednesday.
The decision marks the first time a bank has been found by a U.S. court to be responsible for wrongdoing tied to its
financial-crisis-era dealings, experts say.
The jury also found that Rebecca Mairone, a former Countrywide Financial Corp. executive, was liable for fraud for her
role in leading the hustle loan-processing program. Bank of America, the second-largest U.S. bank by assets, bought
Countrywide in 2008.
"The jury's decision concerns a single Countrywide program that lasted several months and ended before BofA's
acquisition," said a spokesman for the Charlotte, N.C., bank. "We will evaluate our options for appeal."
The trial has taken jurors on a journey inside Countrywide's subprime lending unit, often seen as a central player in
the subprime-mortgage crisis that brought the housing market to its knees. And it has dragged Bank of America back into
the spotlight for Countrywide's alleged misdeeds during the housing boom.
The High Speed Swim Lane, or "Hustle," program was created in late 2007 as the market for those loans was crumbling.
The program's goal was to move into so-called prime loans, which carry the best interest rates and are made to borrowers
with high credit scores. But the government argued that by trying to speed up the production of those loans, executives
removed quality controls that led to bad loans being sold to Fannie and Freddie.
Civil penalties in the case will be determined by Manhattan District Judge Jed Rakoff at a later date.
The final tab will likely be relatively low for Bank of America, which has spent approximately $49 billion in legal
expenses tied to its acquisition of Countrywide. But the outcome could cause reputational harm to the bank, which has
worked for the last three years to put its legal troubles behind it.
The verdict marks a victory for the U.S. Attorney for the Southern District of New York, Preet Bharara, who is the
first federal prosecutor to win a case by using a federal statute created during the savings and loan crisis. The
Financial Institutions Reform, Recovery and Enforcement Act of 1989, or Firrea, extends the statute of limitations for
civil fraud to 10 years.
To sue under Firrea, the government had to establish that a federally insured financial institution was harmed by the
fraudulent conduct. The government argued that Bank of America, a federally insured financial institution, harmed itself
by exposing the bank to fallout from the conduct.
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