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Bank of America Fined $1.3B in ‘Hustle’ Case

gavelA federal judge has ordered Bank of America to pay nearly $1.3 billion in penalties over a fraud case decided last year.

Wednesday's judgment concludes the sentencing phase of a case decided in October 2013, when a 10-person jury held BofA liable for risky loans originated by Countrywide, which the bank acquired in 2008. Those loans were later sold to Fannie and Freddie, leading to significant losses.

The case revolved around a lending procedure referred to as the "High-Speed Swim Lane"—"Hustle," for short—which prosecutors say was designed to churn out loans as quickly as possible with little regard for risk. In a statement released following October's verdict, U.S. Attorney Preet Bharara said the program "treated quality control and underwriting as a joke."

The sum for the sentence was decided by U.S. District Judge Jed S. Rakoff, an official with a reputation for taking a tough stance on the financial services industry. In a blistering 19-page opinion, Rakoff described the HSSL process as "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."

Though prosecutors had originally asked for little more than what they say Fannie and Freddie lost, they later ratcheted the sought-for penalty up to $2.1 billion—an amount BofA's lawyers called a "dramatic departure from reality in court documents." Instead, they said the bank should be penalized for the amount it made in profits from selling the loans, which they estimated to be zero.

In arriving at the $1.3 billion penalty, Rakoff took the value paid for HSSL loans sold to the GSEs—totaling more than 17,000 mortgages—and scaled it down to reflect the percentage of "materially defective" loans.

In a statement on Wednesday, Bharara said the sentence "squarely and emphatically rejects the bank's claims which, besides ignoring the victims' out-of-pocket losses, also ignored that the fraudulent conduct required penalties to be paid for punitive and deterrence purposes as well."

The bank has until September 2 to pay.

Lawrence Grayson, a spokesperson for BofA, said the bank is reviewing the ruling and assessing its options to appeal.

"We believe that this figure simply bears no relation to a limited Countrywide program that lasted several months and ended before Bank of America's acquisition of the company," Grayson said.

Also found liable for civil fraud was Rebecca Mairone, a former mid-level executive at BofA and former COO at Countrywide's Full Spectrum Lending division, where she oversaw the HSSL program.

At BofA, she was the face of the bank's loss mitigation and foreclosure relief efforts, serving as national default servicing executive and then national mortgage outreach executive before taking a post at JPMorgan Chase.

Described as the "catalyst" of the HSSL program, Mairone was penalized in the amount of $1 million, slightly less than the $1.2 million lump sum sought by the government.

Rakoff also took Mairone to task in his decision, describing her as a "relatively new employee who had to prove herself" and who "most aggressively pushed forward the HSSL fraud and most scathingly denounced those who raised concerns."

In an email, Mairone's defense attorney, Marc Mukasey, maintained that she "never intended to defraud anyone and never did defraud anyone."

"Unfortunately, more powerful people chose her as a scapegoat because they thought she was an easy target. We will fight on to clear her name," Mukasey said.

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