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Will BofA Face 'Hustle' Penalty as DoJ Seeks Reversal?

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In what seems to be a setback for Bank of America Corporation (BAC - Free Report) , the Department of Justice (DOJ) is seeking to reverse the ruling that dismissed the $1.27 billion penalty on the bank in May 2016. The fine is related to the sale of risky residential mortgage-backed securities (RMBS) by Countrywide Financial Corp. (acquired in 2008).

Evidences Overlooked

While filing the papers with the 2nd U.S. Circuit Court of Appeals in Manhattan last week, the DoJ prosecutors pointed out that the three judge bench had “overlooked a wealth of evidence” at the time of dismissing the imposed penalty.

Specifically, the DoJ said the Appeals Court ignored the contract terms that showed that Countrywide continued to make representations about the quality of loans and not just at the time of contracting. Additionally, the court “overlooked other misleading statements”, which were made by Countrywide about the loans when they were being sold.

Further, the prosecutors insisted that the court should at least reconsider the lawsuit for new trail, so that the DoJ can present evidences.

Background

The $1.27 billion fine was levied in Jul 2014 by the U.S. District Judge Jed Rakoff, after a jury held BofA accountable for selling defective loans to Fannie Mae and Freddie Mac from Aug 2007–May 2008 via Countrywide. The bank was accused of selling loans underlying these RMBS without properly assessing the creditworthiness of borrowers.

The Federal prosecutors indicted Countrywide for creating the program 'high-speed swim lane' or 'Hustle,' which rewarded employees for the quantity rather than quality of loans. These loans, worth approximately $2.96 billion, were bundled and sold off to Fannie Mae and Freddie Mac.

BofA was sued under the Financial Institution Reform, Recovery and Enforcement Act of 1989. The act permits the government to pursue civil charges against any party for fraud that affects any federally insured financial institution. Moreover, it provides 10-year time limit to bring in cases.

Moreover, a former Countrywide executive, Rebecca Mairone was found guilty of civil fraud. Mairone was ordered to pay $1 million for allegedly playing a lead role in the above-mentioned program. Notably, the fine imposed on her had also been revoked.

What Next?

If the court agrees with the DoJ and the case is again headed for new trail, there is chance of BofA losing the lawsuit and paying the fine.

However, for the time being, it’s wait and watch for BofA investors. Also, this may have impact on other ongoing cases/probes.

Currently, BofA carries a Zacks Rank #3 (Hold). Some better-ranked finance stocks include Hancock Holding Company , State Bank Financial Corporation and Greenhill & Co., Inc. . All these sport a Zacks Rank #1 (Strong Buy).

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