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The Feds Make an Example of Bank of America

In October Bank of America lost a jury trial for fraud brought by the United States based upon Countrywide’s high-speed approval process which was claimed to have incentivized fast approval at the expense of proper underwriting.

Specifically, it was claimed that the process encouraged improper approvals of loans that were immediately sold to Fannie Mae and Freddie Mac. The claim was that Countrywide and a midlevel executive, Rebecca Mairone, knew the loans were not creditworthy as a result of the deficient process, but nevertheless sold the loans to Fannie and Freddie.

After a jury found in favor of the government, the Department of Justice amended its claim for damages by adding $1.23 billion to its demand from Bank of America. The increased demand sought damages based on what the bank charged for the loans as opposed to the profit the bank made on them after expenses, with the idea that it would be a punishment to deter future conduct of this sort. Along those lines, the U.S. has also sought $1.1 million personally from Mairone for her alleged part in the high speed approval process.

This case exemplifies the government’s willingness to seek draconian penalties against banks and executives that it deems acted intentionally.

Along with some of the other consent decrees we have seen as of late, it is apparent that where the government deems conduct intentional it intends to use the situation as an example to the rest of the industry and that recovering damages is not sufficient.

While most lenders need not worry about $2.1 billion, the fact that the Department of Justice seeks penalties upon gross rather than net profits is a point that should not escape anyone’s notice as they decide how seriously they should endeavor to implement the new rules facing the industry.

Ari Karen is an attorney at Offitt Kurman.

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