Banking Law

Appeals court overturns $1.27 billion penalty for Countrywide's sale of risky mortgages

  • Print.

House with dollar sign in the middle

A federal appeals court has overturned a $1.27 billion civil penalty against Bank of America for risky loans sold to Fannie Mae and Freddie Mac by its Countrywide unit.

The New York-based 2nd U.S. Circuit Court of Appeals ruled on Monday that the government had failed to prove Countrywide acted with fraudulent intent when contracting with Fannie and Freddie for the mortgage sales, report the New York Times DealBook blog and the Wall Street Journal Law Blog. How Appealing links to the opinion (PDF) and additional coverage.

A claim of fraudulent misrepresentations in a contract requires proof of fraudulent intent at the time contract execution, the appeals court said. Evidence of a subsequent, intentional breach is not sufficient.

“The trial evidence fails to demonstrate the contemporaneous fraudulent intent necessary to prove a scheme to defraud through contractual promises,” the appeals court said.

The suit had claimed the Countrywide loan program rewarded employees based on the quantity of loans, then sold the risky loans knowing they didn’t match the quality represented in contractual agreements. Bank of America says the mortgage program ended when it acquired Countrywide in 2008.

The New York Times calls the ruling “a disappointment” for Manhattan U.S. Attorney Preet Bharara, who intervened in the whistle-blower suit alleging fraud and sought penalties for alleged violations of mail and wire fraud statutes.

The Wall Street Journal Law Blog, meanwhile, focuses on the defeat for the federal judge who imposed the penalty in the civil-fraud trial, U.S. District Judge Jed Rakoff.

Rakoff has also been reversed in a challenge to a state law banning surcharges on credit card purchases, and in his decision to block a fraud settlement between the Securities and Exchange Commission and Citigroup.

Bank of America’s appeal had alleged that Rakoff displayed bias and he should be removed from the case. The appeals court didn’t address the issue. Rakoff told the Law Blog he is “disappointed that the fine lawyers who represent Bank of America would question my impartiality.”

See also: “Will those who led the financial system into crisis ever face charges?”

Give us feedback, share a story tip or update, or report an error.