Financial Institutions Reform

Court Declines to Vacate Jury Verdict in Countrywide FIRREA Lawsuit

On February 3, Judge Jed S. Rakoff of the United States District Court of the Southern District of New York denied Bank of America Corporation’s and Rebecca Mairone’s motion for judgment as a matter of law, or, in the alternative a new trial. The jury found Bank of America and Mairone liable under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) for the sale of mortgage loans to Fannie Mae and Freddie Mac before the financial crisis. Judge Rakoff found that the jury’s October 23, 2013 verdict was supported by sufficient evidence.  Order.

JPMorgan Finalizes $13 Billion Settlement With Department of Justice

On November 19, the U.S. Department of Justice announced that JPMorgan Chase & Co. has agreed to pay $13 billion to settle a number of federal and state RMBS-related civil claims against JPMorgan and two institutions that JPMorgan acquired, Bear Stearns and Washington Mutual Inc. (WaMu).  Under the terms of the settlement, $4 billion will be distributed in consumer-related relief for mortgage writedowns, anti-blight work and mortgage payment reductions.  The agreement also includes a previously-announced $4 billion settlement with the Federal Housing Finance Agency.  Additionally, JPMorgan will pay a $2 billion civil penalty to the Justice Department for claims brought under the Financial Institutions Reform, Recovery and Enforcement Act, $1.4 billion to the National Credit Union Administration, $515.4 million to the Federal Deposit Insurance Corp. and over $1 billion combined to the states of California, Illinois, Massachusetts, Delaware and New York.  JPMorgan acknowledged in a statement of facts that its employees and employees of Bear Stearns and WaMu failed to disclose to securitization investors that certain loans did not comply with underwriting guidelines.  The settlement does not resolve any potential criminal liability of JPMorgan or its employees.  Settlement AgreementStatement of Facts.

SEC and DOJ File Parallel Civil Suits Alleging BofA Defrauded RMBS Investors

On August 6, the SEC and the U.S. Department of Justice filed parallel civil suits against several Bank of America affiliates, alleging that the bank defrauded investors in connection with its packaging and sale of US$850 million in RMBS.  The actions, both filed in the Western District of North Carolina, allege that BofA misled investors by failing to disclose information concerning the quality of the loans backing the RMBS, including their origination channel, misrepresenting compliance with underwriting guidelines, and making other false statements in loan tapes and free writing prospectuses filed with the SEC.  The SEC sued BofA for alleged violations of Sections 17(a)(2), 17(a)(3), and 5(b)(1) of the Securities Act of 1933.  SEC Complaint.  The DOJ sued BofA for alleged violations of Sections 1001 and 1014 of the Financial Institutions Reform, Recovery and Enforcement Act of 1989.  DOJ Complaint.

U.S. Sues Bank of America for Alleged Mortgage Fraud Against GSEs

On October 24, the U.S. Attorney for the Southern District of New York filed suit against Bank of America and Countrywide seeking damages for over $1 billion in alleged losses suffered by Fannie Mae and Freddie Mac.  The complaint alleges that Bank of America and Countrywide violated the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) and the False Claims Act by selling defective loans originated through a fraudulent origination program called the “High-Speed Swim Lane” (HSSL) or “the Hustle” that was implemented by Countrywide from 2007 to 2009.  The Government alleges that the program intentionally was designed to process loans quickly, ignoring or eliminating quality controls, including by replacing underwriters with “loan processors” who are alleged to have been “unqualified and inexperienced clerks.”  The suit further alleges that Countrywide, and later Bank of America, concealed the defects from Fannie Mae and Freddie Mac as they continued to sell these defective loans through 2009.  The Government seeks civil penalties under FIRREA as well as treble damages under the False Claims Act.  In a press release issued the day of the filing, the U.S. Attorney described the lawsuit as a “clear message that reckless lending practices [would] not be tolerated.”

U.S. Sues Wells Fargo Over Allegedly Defective FHA Mortgages

On October 9, the United States Attorney for the Southern District of New York filed suit against Wells Fargo Bank, N.A. in the United States District Court for the Southern District of New York.  The civil suit seeks damages, including treble damages where available, and civil penalties for alleged violations of the False Claims Act and the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, breach of fiduciary duty, gross negligence, negligence, unjust enrichment, and payment under mistake in fact.  The Government’s complaint alleges that Wells Fargo, a participant in the Federal Housing Administration’s mortgage lending insurance program, failed to report over 6,000 mortgage loans that were in fact ineligible for FHA insurance.  As a result of Wells Fargo’s alleged misconduct, the Government allegedly paid hundreds of millions of dollars in connection with insurance claims made on these loans.  The alleged defects in connection with Wells Fargo’s origination process – that violations of stated mortgage lending guidelines resulted in poor quality loans – are similar to the allegations that underlie many RMBS investor actions.  Complaint.