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Bank of America’s Use of Fraud Statute Challenged

Thomson Reuters reported U.S. District Judge Jed Rakoff challenged a fraud statute the United States government applied against Bank of America Corp. in litigation involving the sale of mortgages that negatively affected Freddie Mac and Fannie Mae. The fraud statute at issue was a law not used too often. The statute was applied against Bank of America Corp. in a lawsuit involving transactions stemming from Countrywide Financial Corp., which Bank of America Corp. bought.

The Manhattan, NY judge was not sure if the statute should be used. The United States Department of Justice’s desired to bring fraud cases against well known banks such as Bank of America Corp. under a law that went into play after the savings and loan crises of the 1980s.

Judge Rakoff did not rule on the request to use the law. He said he would issue a decision by May 13 of this year about whether to dismiss the lawsuit. For those involved in the lawsuit, they may feel comforted that the case is a civil dispute, rather than a crime. In a civil case, the most a party may lose is money, and usually such matters get settled outside of trial because the solutions to such problems are usually up to the parties themselves. The case alleges Bank of America is cause of more than $1 billion in losses incurred by Freddie Mac and Fannie Mae.

Bank of America Corp. acquired Countrywide in 2008. In the financial dispute, the federal government seized Fannie Mae and Freddie Mac in 2008. They placed them into a conservatorship. The lawsuit was filed in October 2012. The case claims Bank of America Corp. defrauded Fannie Mae and Freddie Mac through a program begun at Countrywide Financial Corp. In litigation there may be allegations of fraud when one party is missing information the other party does not have. Sometimes these concerns get flushed out in discovery, and the parties find out that each side has participated in some wrongdoing.

According to Thomson Reuters, “Hustle” was a program meant to hurry up mortgage processing. “Hustle” reduced fraud detections. The result was loans that had problems. The problems exceeded what the industry standard allowed, said the Justice Department.

The case may not have been something that could have been avoided. Sometimes when people intend to sue there is no stopping them. The defendant just has to accept the case and defend it vigorously. The case is based on the Financial Institutional Reform, Recovery and Enforcement Act of 1989 (FIRREA). According to Thomson Reuters, FIRREA lets the government to go after civil penalties against anyone who commits a fraud “affecting a federally insured financial institution.” The fraud law has a burden of proof that is not high. The statute provides subpoena power and a statute of limitations of 10-years.

There are three banks involved in similar lawsuits. Besides Bank of America Corp., Bank of New York Mellon Corp and Wells Fargo & Co. are in cases against the government. The banks argue the fraud law cannot apply, but this may not be a sure argument. The judge in this case will soon let each side know if the law applies or not.

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