Bank of America and Countrywide: Selling Loans They Knew Were Defective

Bank of America and Countrywide False Claims Act settlements included a $1 billion agreement in 2012 over alleged Federal Housing Administration mortgage fraud and a separate mortgage resolution in 2014. The cases reached into underwriting, appraisals, loan sales and decisions about what to tell the government. If you reviewed defective mortgages, handled a repurchase demand or saw an insurance claim go forward despite an internal warning, the work behind these settlements may look familiar.

The 2012 Settlement Covered FHA Loans and HAMP Eligibility

The February 9, 2012 agreement resolved government allegations that Countrywide recklessly underwrote mortgages insured by the Federal Housing Administration for unqualified borrowers and originated loans based on inflated appraisals. Bank of America had acquired Countrywide in 2008. The agreement formed part of a broader resolution involving the country’s five largest mortgage servicers.

The federal money sat behind the mortgage. The Federal Housing Administration insured loans, and the government alleged that Countrywide’s underwriting and appraisal practices exposed its insurance fund to losses. A borrower’s qualifications and a property’s valuation therefore mattered beyond the approval at the lending desk. They helped determine which loans carried government insurance.

The settlement called for an immediate $500 million payment for the harm to the Federal Housing Administration. The other half of the obligation was deferred to fund modifications for Countrywide borrowers with underwater mortgages. Bank of America was to approach potentially eligible borrowers and offer modifications to those who qualified and accepted. Any balance left after three years was to go directly to the United States.

That structure put homeowner relief inside the settlement itself. The settlement terms committed money to different purposes: an immediate government payment and a modification program backed by a later payment obligation.

The same resolution covered allegations about the Home Affordable Modification Program. The government alleged that Bank of America failed to determine homeowners’ eligibility to participate in HAMP.

How Investigators Built the FHA Case

The Department of Housing and Urban Development’s inspector general described serving subpoenas, interviewing witnesses and reviewing loan files while working with the U.S. Attorney’s Office for the Eastern District of New York.

The HAMP investigation brought in the Special Inspector General for the Troubled Asset Relief Program and the Federal Housing Finance Agency’s inspector general. Those agencies worked with the Eastern District on the eligibility allegations.

For a mortgage insider, the loan-file review is the useful part of that history. The appraisal, underwriting decision and insurance eligibility record describe different parts of the same transaction. Interviews can explain how those records were produced and who made the decisions behind them. That is the connection between a file on a desk and a government fraud investigation.

The 2014 Deal Contained Separate Mortgage Claims

The civil resolution announced on August 21, 2014 carried a $16.65 billion headline. It covered mortgage-backed securities, mortgage lending and other federal and state claims. Its terms included $7 billion in consumer relief and a $5 billion civil penalty under the Financial Institutions Reform, Recovery and Enforcement Act.

The Justice Department’s fiscal-year account identified $1.85 billion under the False Claims Act. The executed agreement separates the mortgage payments by the conduct being resolved. A sale to Fannie Mae, an FHA insurance claim and a reimbursement already received from another lender each tell a different money story.

Defective Loans Sold to Fannie Mae and Freddie Mac

Bank of America and Countrywide agreed to pay $1 billion to resolve False Claims Act claims concerning loans sold to Fannie Mae and Freddie Mac. The U.S. Attorney’s Office for the Southern District of New York investigated the origination and sale of defective loans from Countrywide’s Consumer Markets Division and Bank of America’s Retail Lending Division, working with the Federal Housing Finance Agency’s inspector general and the Special Inspector General for the Troubled Asset Relief Program.

The companies admitted that they knew many loans were defective, that many promises about loan quality made to the government-sponsored enterprises were inaccurate, and that they failed to report loans their own reviews had identified as defective. Those admissions connect the underwriting file to the loan sale and then to the decision to keep an identified problem inside the business.

An internal review had found the defect. The buyer still did not get the information. We see the absurdity in calling something quality control when the finding stops before it reaches the party carrying the risk.

The settlement also resolved three private whistleblower cases concerning loans sold to Fannie Mae and Freddie Mac. The agreement describes allegations about inflated appraisals, sales of defective mortgages with inaccurate statements about quality, and failures to report defective loans. Those are distinct views into the same lending operation: what supported the loan, what the seller promised and what it disclosed afterward.

FHA Insurance on Ineligible Loans

The agreement allocated $800 million to claims involving Federal Housing Administration loans originated by Bank of America or Countrywide on or after May 1, 2009. This was a separate payment from the earlier Countrywide resolution.

The U.S. Attorney’s Office for the Eastern District of New York and the Department of Housing and Urban Development investigated whether Bank of America knowingly made FHA-insured loans that violated underwriting guidelines. The Justice Department reported that the bank caused the Federal Housing Administration to insure ineligible loans, leaving the department with hundreds of millions of dollars in losses. Its announcement also recorded the bank’s concession that it made misrepresentations about loan quality to the Federal Housing Administration.

Bank of America acted as a direct endorser of Federal Housing Administration loans. That role gave a private lender authority to commit government funds to mortgage insurance. The underwriting and eligibility decisions made inside the bank could put the federal insurance fund behind a loan before a later default produced a claim.

For someone who reviewed these files, the crucial comparison is between the loan’s support and the assurances used to obtain insurance. False certifications carry the problem from an internal lending decision into a government payment program.

Duplicate FHA Reimbursement for Losses Already Recovered

The agreement allocated another $50 million to the claims investigated in connection with a corporate whistleblower’s complaint. The whistleblower alleged that Bank of America and Countrywide sought Federal Housing Administration reimbursement for amounts they had already recovered from third-party correspondent lenders.

This allegation followed money coming back into the bank after the loan had been acquired from another lender. The question was whether that earlier recovery appeared in the account given to FHA when the bank sought reimbursement.

The U.S. Attorney’s Office for the Western District of North Carolina investigated the allegation. The settlement also covered Bank of America’s resolution of repurchase claims with Fannie Mae and Freddie Mac where, according to the allegations, compensation received from correspondent lenders for actual or anticipated mortgage losses had not been disclosed.

The loss could look very different in the correspondent-lender account and the claim sent onward. Someone who handled repurchases or reconciled those recoveries could recognize that gap without having made the original underwriting decision.

Countrywide’s Exceptions Went Into Securities

Countrywide’s willingness to make loans it could sell helps explain the business incentive behind the mortgage practices. The securities portion of the 2014 resolution described Countrywide originating loans outside its underwriting guidelines when it could sell the loans and their risk onward.

The Justice Department’s account of the acknowledged facts describes undisclosed alternative guidelines that permitted riskier borrowers. Countrywide knew its exception loans performed much worse than loans made without exceptions, yet it did not disclose that fact to investors. Investors were told that underwriting standards were designed to ensure borrowers could repay.

Saleability supplied the incentive. The borrower’s ability to repay supplied the sales pitch. The difference matters to the employee who saw exception approvals, reviewed performance or understood what investors were being told. The lending business generated information about risk that its customers did not receive.

What the Mortgage Files Can Show

The useful False Claims Act evidence connects the loan, the promise about its quality, the internal finding and the payment. Bank of America’s resolutions show why those records have to be read together.

An origination file can explain the borrower’s qualifications and the appraisal used to support the loan. A quality review can identify a defect and when the business recognized it. The representations supplied to Fannie Mae or Freddie Mac show what the buyer was told. The reporting history shows what happened to the defect after discovery.

The duplicate-reimbursement allegations add the accounting comparison: Bank of America and Countrywide allegedly sought Federal Housing Administration reimbursement for losses already covered by correspondent lenders. The amount already recovered, the reimbursement requested and the disclosure connecting them give the transaction its meaning. The employee who knows how those accounts fit together may see something that a reviewer of the insurance claim alone would miss.

The Congressional Research Service’s 2009 report, Qui Tam: The False Claims Act and Related Federal Statutes, explains that claims can reach federal money through other recipients. That payment path helps explain why a private company’s records matter in a case about government money. We follow the claim through the payment chain with you and the whistleblower lawyers suited to the mortgage program involved.

JPMorgan Chase and Who Signed the Certification

A whistleblower complaint against JPMorgan Chase alleged a revealing response to problems inside its government-insured lending operation. The complaint shows where responsibility for signing went once the problems surfaced:

The same complaint alleged that JPMorgan Chase used a submission matrix to track files rejected by FHA and VA, and continued submitting loans without adequate documentation. Those allegations put internal review findings beside the business’s later submissions.

The parallel is the distance between what the lender’s own work revealed and what its certification conveyed. Moving the signature to a different desk does nothing to repair a deficient loan file. An insider who knows why the signing responsibility changed can explain a decision the final certification does not show.

What Share Is Possible?

A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. We assess how your knowledge of the loans, internal warnings or recovered losses could support a mortgage-fraud whistleblower case.

You Know What Happened to the Loan

If you saw a defective loan approved, a warning withheld from a buyer or a loss claimed after another lender had paid it, speak with our mortgage-fraud whistleblower experts. We turn your knowledge of the lending operation into a case strategy and bring in mortgage-fraud whistleblower lawyers who understand FHA insurance, loan sales and the False Claims Act. We stay beside you from the first review of a disputed loan through the decisions that shape your case.