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Justice Department Files $1B Suit Over Countrywide Loans Sold to Fannie Mae and Freddie Mac

Posted in Financial Services Litigation

On October 24, 2012, the U.S Department of Justice filed a $1 billion False Claims Act lawsuit against Bank of America alleging that its Countrywide unit sold loans to Fannie Mae and Freddie Mac that ended up in default.  The lawsuit is the first by the department to allege fraud concerning mortgages sold to the Government Sponsored Enterprises, and the sixth in the past 18 months to allege a major bank engaged in "reckless" lending practices.   

Bank of American denies the accusation of wrongdoing. CNNMoney.com reported that Bank of America spokesman Lawrence Grayson stated "Bank of America has stepped up and acted responsibly to resolve legacy mortgage matters," he said. "The claim that we have failed to repurchase loans from Fannie Mae is simply false. At some point Bank of America can’t be expected to compensate every entity that claims losses that actually were caused by the economic downturn."

As reported by Bloomberg.com columnist Jonathan Weil, while the False Claims Act imposes liability only on those that defraud the federal government, the lawsuit concerns the sale of loans to Fannie Mae and Freddie Mac before the GSEs were seized by the government.   The lawsuit raises interesting legal issues that will likely be played out in the action. 

In October, the DOJ filed a False Claims Act lawsuit against Wells Fargo, alleging that the bank "recklessly" originated and underwrote retail FHA loans under the FHA’s Direct Endorsement Program.  However, Wells Fargo contends that these matters were settled as part of the $25B national mortgage servicing settlement reached last year.  On November 1, 2012, Wells Fargo filed a motion asking the court to dismiss the case because the lawsuit violates the conditions of the settlement.  The result of the motion may have broad implications for the parties that were involved in the servicing settlement.

Read more at Marketplace.org; CNNMoney; DOJ Press Release;