October 24, 2012
The Latest Fraud Case Is Against Countrywide
Posted by David Zaring

The USAO in the SDNY is beginning to hold banks accountable for the financial crisis, and the critical legal move has been to go after them pursuant to the False Claims Act, an issue because the government entities (more on this later) Fannie, Freddie, and HUD underwrote all those mortgages sold on by the banks.  If they fraudulently misrepresented the quality of the mortgages, or their oversight of same, that could be a false claim made to the government.  Today, the False Claims Act suit was made against Countrywide, since bought up by Bank of America.

  • Basically, the argument in the complaint is that Countrywide's "Hustle" program, started when the housing market had collapsed, and the company really needed some mortgage-related revenue, removed an underwriting and compliance check from its screening process, even for stated income (that is, the borrower just named her income, and the bank didn't verify it) loans.  That way, it could originate and sell on a ton of loans.
  • But that's not fraud - the fraud is to do it and not tell the government entity that is ensuring the mortgages you originate that you have changed your review.  So the problem was not just that this program existed - it is that Fannie didn't know about it.  Or so the government argument must go.
  • The federal civil frauds statute includes provisions providing for treble damages, and the USAO has asked for them in this case.  It requires that that the statement be made to a government entity, and that the defendant "knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval."
  • The USAO does like to rely on the work of others.  This time there was a relator involved, so this is a qui tam action.  He gets a chunk of any profits, and here, that could easily end up being tens of millions of dollars.  The latest in qui tam research that I know about comes from David Freeman Engstrom at Stanford.
  • One legal wrinkle here might turn on whether Fannie and Freddie are government entities, pursuant to the False Claims Act.  The colorable argument to the contrary would turn on cases like Nevada ex rel. Hager v. Countrywide Home Loans Servicing, LP, 812 F. Supp. 2d 1211, 1217 (D. Nev. 2011) ("Fannie Mae and the federal government have not become so interdependent with each other as to make Fannie Mae's actions the actions of the federal government.") (D. Nev. July 9, 2012); Roberts v. Cameron-Brown Co., 556 F.2d 356, 358-60 (5th Cir. 1977) (Fannie Mae acts are private action); A. Michael Froomkin, Reinventing the Government Corporation, 1995 U. Ill. L. Rev. 543, 634 (1995).  But there may be more on point law here that I don't know about.

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