On February 4, the Department of Justice filed a complaint in the Central District of California against two Standard & Poor’s entities in connection with credit ratings S&P provided for certain RMBS and CDOs. The government asserts claims under the 1989 Financial Institutions Reform, Recovery and Enforcement Act (FIRREA), which allows the government to bring civil claims for mail fraud, wire fraud, and “financial institution fraud” for alleged frauds perpetrated against federally insured financial institutions. The complaint alleges that from September 2004 through October 2007, S&P knowingly issued inflated ratings of non-prime RMBS and CDOs, delayed downgrading those products, and knowingly used faulty ratings methodology. The government seeks statutory civil penalties totaling over $5 billion. Complaint.
Recovery and Enforcement Act of 1989 (FIRREA)
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.”