July 30, 2014
Reiss on Big BoA FIRREA Penalty
Bloomberg BNA quoted me in FIRREA-Fueled Penalty Against BofA Signals More Risk for Large Institutions (behind a paywall). It reads in part,
A federal judge in New York ordered Bank of America to pay $1.26 billion in civil penalties to the U.S. government in connection with a Countrywide lending program, setting up a likely appeal in one of the most closely watched cases in the financial services arena (United States v. Bank of Am. Corp., S.D.N.Y., No. 12-cv-01422, 7/30/14).
The ruling by Judge Jed Rakoff of the U.S. District Court for the Southern District of New York, which also said former Countrywide official Rebecca Mairone must pay $1 million in installments, followed an October jury verdict that found Bank of America liable for Countrywide’s sale of bad loans to Fannie Mae and Freddie Mac, some of which were securitized.
Countrywide sold those loans under its “High-Speed Swim Lane” program—an initiative aimed at speeding the loan approval process and one launched before Bank of America acquired Countrywide in 2008.
Rakoff called the nine-month HSSL program “from start to finish the vehicle for a brazen fraud,” and imposed a $1,267,491,770 penalty on Bank of America.
The amount was less than the $2.1 billion sought by the government, but well above what Bank of America argued was appropriate, which was $1.1 million at the most .
“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,” Bank of America spokesman Lawrence Grayson told Bloomberg BNA July 30. “We are reviewing the ruling and assessing our appellate options,” he said.
* * *
According to Rakoff, Firrea could have allowed a penalty in this case that would have equaled the value of the loan transaction itself, which totaled $2.96 billion.
Rakoff, citing the discretion granted to judges in such cases, reduced the penalty to $1.267 billion, saying not all of the loans were flawed.
Brooklyn Law School Professor David Reiss called Rakoff’s ruling significant and a new turn in an important area of case law for businesses.
“We’re beginning to see a jurisprudence of Firrea penalties and a penalty regime that is very pro-government,” Reiss told Bloomberg BNA. “This shows that the penalty can be as high as the nominal amount of the transaction. It’s good guidance in the sense that it helps businesses know the outer boundaries of their risk, but it’s a generous view of deterrence,” he said.
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