Bank of America Hit with $1.27 Billion Criminal Penalty

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Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

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UPDATED: Jul 30, 2014

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Bank of America has been issued a $1.27 billion fine for its involvement in the illegal “Hustle” mortgage program.  The Hustle mortgage sales were carried out by executives at Countrywide Financial Corporation, which BofA bought in 2008.  Although the bank argued that its liability was minimal because the illegal activities of Countrywide stopped before BofA purchased the company, jurors in the bank’s federal trial determined it was liable for Hustle’s fraudulent activities. 

Hustle Mortgage Sales Found to be Fraudulent

The Hustle mortgage sale program, so nicknamed for the acronym HSSL which stood for “high-speed swim lane,” was Countrywide Financial’s mortgage sales system that heavily incentivized lending officers based on the number of home loans they sold – resulting in mortgages that cut corners and ignored internal controls that prevented sub-prime lending.  Thousands of the Hustle mortgages were then sold to government loan servicers Frannie Mae and Freddie Mac before the mortgage crisis significantly devalued the investment – resulting in significant losses for both Frannie and Freddie.

Last October, Bank of America was found liable by a jury in federal court for its involvement in the Hustle program, putting into motion the penalty phase that culminated in this week’s $1.27 billion fine.  Jurors concluded that by purchasing Countrywide Financial, BofA was complicit in the process of quickly packaging and selling sub-prime loans to Fannie and Freddie, making the bank liable for the fraudulent transactions.  Although BofA argued throughout its criminal trial that it had no part in the Hustle scheme, and the illegal activity ceased before it purchased Countrywide, federal jurors disagreed.

Bank of America Issued $1.27 Billion Criminal Penalty

After a 9-month sentencing phase, Judge Jed Rakoff determined that Bank of America deserved the $1.27 billion fine based on how much the Hustle fraud cost Fannie and Freddie.  Chastising BofA, Rakoff wrote in his 19-page opinion, “It was from start to finish the vehicle for a brazen fraud by the defendants, driven by a hunger for profits and oblivious to the harms thereby visited, not just on the immediate victims, but also on the financial system as a whole.”  After strongly criticizing the Hustle program, Judge Rakoff outlined the process in which he determined the appropriate penalty.

The government, which sought over $2.1 billion in penalties, argued that the price of 28,900 loans should be included in the penalty – significantly more than BofA’s estimate of 11,500.  In the end, Judge Rakoff decided to penalize BofA for the sale of 17,600 loans, excluding mortgages that were made at field branches of Countrywide which BofA had no involvement in.  Judge Rakoff then determined that since 57% of the mortgages turned out to be of “acceptable quality” by expert analysis, the bank would not have to pay the entire amount that Fannie and Freddie paid Countrywide – about $2.96 billion.  After settling on the $1.27 billion figure, Judge Rakoff ordered BofA to pay the amount in full by September 2nd of this year.  Because the bank maintains that it had no involvement in the Hustle scheme carried out by Countrywide, the fine will likely wait until BofA determines its avenues for appeal.

Former Countrywide executive Rebecca Mairone, also found guilty for the Hustle scheme in October, was issued a $1 million penalty for her role.  Lawyers for Mairone claim she was an innocent scapegoat, and have also promised an appeal.

BofA Penalty Could Influence Sub Prime Mortgage Settlement

The substantial criminal penalty represents a blow to BofA, which is attempting to negotiate a civil settlement with the US Government over the sale of mortgage securities that went bust during the recent financial crisis.  Bank of America is involved in negotiations with the Justice Department to resolve a sub-prime mortgage securities lawsuit, and the resolution of the Hustle criminal proceedings are likely to give the government more leverage in the related settlement.  Sources indicate the Justice Department is seeking as much as $17 billion – with some of that figure arising from BofA liability for fraud committed by Countrywide and Merrill Lynch, another company purchased during the financial crisis.

Bank of America’s position that it is not significantly liable for the misdeeds of Countrywide seems untenable after the Hustle litigation, and the Department of Justice is likely to exploit the opportunity to increase the upcoming settlement.  With the cloud of civil penalties for sub-prime lending hanging heavy, Judge Rakoff’s $1.27 billion criminal penalty is just the beginning for Bank of America.

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