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An Appeals Court Has Thrown Out Bank of America’s $1.3 Billion Fine

Bank Of America Headquarters As Revenue Seen Declining In 2016Bank Of America Headquarters As Revenue Seen Declining In 2016
Bank of America headquarters in Charlotte, N.C.Photograph by Bloomberg via Getty Images

A U.S. appeals court on Monday threw out Bank of America’s $1.27 billion penalty in a fraud case over defective mortgages, dealing the Justice Department a major setback in a lawsuit related to the 2008 financial crisis.

The 2nd U.S. Circuit Court of Appeals in New York said the proof at trial was insufficient under federal fraud statutes to establish liability in connection with the “Hustle” mortgage program, which was run at the former Countrywide Financial.

Bank of America (BAC), in a statement, said it was pleased with the ruling. A spokesman for Manhattan U.S. Attorney Preet Bharara, whose office oversaw the lawsuit and took it to trial, had no immediate comment.

The ruling overturns a 2013 jury verdict in a lawsuit by the Justice Department against Bank of America, which bought Countrywide in July 2008, and Rebecca Mairone, a former midlevel Countrywide executive.

 

The jury found the bank liable for Countrywide’s sale of shoddy loans originated by its “High Speed Swim Lane” program, also called HSSL or Hustle. The loans were sold to mortgage finance giants Fannie Mae and Freddie Mac

The Justice Department contended the program rewarded staff for generating more mortgages and emphasizing speed over quality, and resulted in Fannie Mae and Freddie Mac being lied to about the quality of loans they bought.

The government seized both companies during the financial crisis and put them into conservatorships.

Following the verdict, U.S. District Judge Jed Rakoff in 2014 imposed a $1.27 billion penalty on Bank of America and ordered Mairone to pay $1 million.

The lawsuit was pursued under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), a law adopted after the 1980s savings and loan scandal.

The Justice Department has relied on that law to target conduct related to the 2008 financial crisis in part because of its 10-year statute of limitations, versus five years under securities fraud laws.