A U.S. appeals court has overturned a $1.27 billion penalty brought against Bank of America over defective mortgages sold by Countrywide in the run-up to the financial crisis that began in 2008, Reuters reports.
In 2013, the U.S. Department of Justice brought a suit against Bank of America alleging that Countrywide, which Bank of America acquired in 2008, had defrauded government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac by selling them thousands of mortgages that had not been underwritten to GSE guidelines.
To date, it is one of the only suits brought against a U.S. bank over toxic mortgages to go to trial.
In fall 2013, after a four-week trial, a federal jury in Manhattan found Bank of America liable for fraud in connection with the faulty mortgages. The jury also found former Countrywide executive Rebecca Mairone liable for one count of fraud. Mairone had been accused of overseeing a process called the “High Speed Swim Lane,” or “Hustle,” that was allegedly used by Countrywide in 2007 to speed mortgage originations by side-stepping certain aspects of the application review process.
Federal prosecutors allege that this program, in part, is what led to the shoddy loans that were passed onto Fannie Mae and Freddie Mac and ultimately to investors.
Federal prosecutors had originally sought damages of up to $2.1 billion, but the court lowered the penalties to about $1.2 billion. Bank of America appealed the decision.
On Monday, the Second U.S. Circuit Court of Appeals in New York ruled that there was insufficient proof, under federal fraud statutes, to show that Countrywide intentionally set out to defraud Fannie and Freddie and investors. U.S. Circuit Judge Richard Wesley said although evidence showed that Countrywide breached contracts to sell loans of a specified quality, no proof existed that it intended to deceive the buyers when those contracts were executed.
“The trial evidence fails to demonstrate the contemporaneous fraudulent intent necessary to prove a scheme to defraud through contractual promises,” Wesley wrote in his decision.