PREET BHARARA United States Attorney for the Southern District of New York By: PIERRE G. ARMAND JAIMIE L. NAWADA Y Assistant United States Attorneys 86 Chambers Street, Third Floor? New York, New York 10007 Tel: (212) 637-2724/2528 Fax: .(212) 637-2730 Email: Pierre.Armand@usdoj.gov Jaimie.Nawaday@usdoj.gov UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK UNITED STATES OF AMERICA ex reI. EDWARD O'DONNELL, Plaintiff, v. BANK OF AMERICA CORPORATION, successor to COUNTRYWIDE FINANCIAL CORPORATION, COUNTRYWIDE HOME LOANS, INC., and FULL SPECTRUM LENDING, Defendants. UNITED STATES OF AMERICA 12 Civ. 1422 (JSR) Plaintiff-Intervenor, v. COUNTRYWIDE HOME LOANS, INC., COUNTRYWIDE FINANCIAL CORPORATION, BANK OF AMERICA CORPORATION, and BANK OF AMERICA, N.A., Defendants. COMPLAINT-IN~INTERVENTION OF THE UNITED STATES OF AMERICA JURY TRIAL DEMANDED Plaintiff, the Unite.d States of America, by its attorney, Preet Bharara, United States Attorney for the Southern District of New York, having filed a notice of intervention pursuant to 31 U.S.C. ? 3730(b)(4), brings this complaint-in-intervention and alleges upon information and belief as follows: INTRODUCTION 1. This is a civil fraud action by the United States against Defendant Bank of America Corporation ("Bank of America") and Bank of America N.A. ("BANA"), which acquired and are the successor to Countrywide Financial Corporation ("Countrywide Financial" or "CFC") and Countrywide Home Loans, Inc. ("Countrywide Home Loans" or "CHL") (collectively referred to herein as "Countrywide"), to recover damages and penalties arising from a scheme to defraud the Federal N~tional Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac") (collectively, "government-sponsored enterprises" or "GSEs") in connection with Countrywide's residential mortgage lending business. This action seeks to recover treble damages and penalties under the False Claims Act, 31 U.S.C. ? 3729 et seq. ("FCA"), and civil penalties under the Financial Institutions Reform, Recovery, and Enforcement Act, 12 U.S.C. ? 1833a ("FIRREA"). 2. As set forth more fully below, in 2007, as loan default rates rose across the country and the GSEs reevaluated their loan purchase requirements, Countrywide rolled out a new "streamlined" loan origination model it called the "Hustle." In order to increase the speed at which it originated and sold loans to the GSEs, Countrywide eliminated every significant checkpoint on loan quality and compensated its employees solely based on the volume of loans originated, leading to rampant instances of fraud and other serious loan defects, all while 2 Countrywide was informing the GSEs that it had tightened its underwriting guidelines. When the loans predictably defaulted, the GSEs incurred more than a billion dollars in unreimbursed losses. 3. Countrywide was once the largest mortgage lender in the United States, having originated over $490 billion in mortgage loans in 2005, over $450 billion in 2006, and over $408 billion in 2007. In the mid-2000's, Countrywide dominated the subprime lending market, originating subprime loans principally from its Full Spectrum Lending ("FSL") division. In early 2007, however, when the subprime market collapsed, Countrywide responded to its resulting revenue shortfall in two ways. First, Countrywide shifted the focus of FSL to originating prime, conforming loans that qualified for sale to the GSEs. Second, Countrywide implemented the "Hustle" in FSL, which reduced the amount of time spent processing and underwriting conventional loans, thereby boosting loan volume and revenue. 4. According to internal Countrywide documents, the aim of the Hustle (or "HSSL," for "High Speed Swim Lane") was to have loans "move forward, never backward" and to remove unnecessary "toll gates" slowing down the loan origination process. In furtherance of these aims, Countrywide's new origination model removed the processes responsible for safeguarding loan quality and preventing fraud. For instance, Countrywide eliminated underwriter review even from many high risk loans. In lieu of underwriter review, Countrywide assigned critical underwriting tasks to loan processors who were previously considered unqualified even to answer borrower questions. At the same time, Countrywide eliminated previously mandatory checklists (or "job aids") that provided instructions on how to perform these underwriting tasks. Under the Hustle, such instructions on proper underwriting were considered nothing more than unnecessary , forms that would slow the swim lane down. 3 5. Countrywide also eliminated the position of compliance specialist, an individual previously responsible for conducting a final, independent check on a loan to ensure that all conditions on the loan's approval were satisfied prior to funding. Finally, to further ensure that loans would proceed as quickly as possible to closing, Countrywide revamped the compensation structure of those involved in loan origination, basing performance bonuses solely on volume. Whereas loan processors and others previously received bonuses based on a combination of the quality and volume of loans they processed, the Hustle. removed any quality factor in . compensation, making clear that employees should prioritize production. 6. Although Countrywide management was repeatedly informed that the new model would have catastrophic consequences for loan quality, the Hustle began in full force in approximately August of2007,just as the GSEs began tightening their purchase requirements due to escalating default rates across the country, and continued through 2009, well after Bank of America's acquisition of Countrywide in July 2008. The Hustle was never disclosed to the GSEs, although the vast majority of its resulting loans were funneled to the GSEs with the knowing misrepresentation that they were investment-quality loans that complied with GSE requirements. Indeed, in late 2007, shortly after it had fully implemented the Hustle, Countrywide represented to the GSEs that it had strengthened its underwriting guidelines. 7. Countrywide also concealed the quality control reports on Hustle loans demonstrating that instances of fraud and other material defects (i.e., defects making the loans ineligible for investor sale) were legion. Specifically, Countrywide's own quality control reports identified material defect rates of nearly 40% in certain months, rates that were nearly ten times the industry standard defect rate of approximately 4%. But Countrywide failed to abandon the Hustle 4 even when it became clear that the loans were of a disastrous quality. Instead, Countrywide offered quality control employees within FSL a one-time bonus for "rebutting" defect findings made by the corporate quality control department in an attempt to make FSL' s defect rates appear lower to investors. 8. After the Hustle loans defaulted and the GSEs reviewed them for compliance with their guidelines, Countrywide and Bank of America compounded the harm to the GSEs by refusing to repurchase Hustle loans or reimburse the GSEs for losses already incurred, even where the loans admittedly contained material defects or even fraudulent misrepresentations. As a result of the Hustle, Countrywide 'and later Bank of America defrauded the GSEs of more than one billion dollars. 9. The United States seeks the maximum amount of damages _and the maximum amount of civil penalties allowed by law. Specifically, the United States seeks treble damages under the False Claims Act and civil penalties under FIRREA for the thousands of Hustle loans sold to the GSEs, including any losses or gains resulting from the fraud. JURISDICTION AND VENUE 10. This Court has jurisdiction pursuant to 31 U.S.C. ? 3730(a), 28 U.S.C. ? 1331, and 12 U.S.C. ?1833a. 11. Venue is proper in this judicial district pursuant to 31 U.S.C. ? 3732(a) and 28 U.S.C. ?? 1391(b)(l) and (c) because the defendants transact business in this judicial district, including by originating loans and transferring loans to investors headquartered in this district. PARTIES AND RELEVANT ENTITIES 12. Plaintiff is the United States of America. S 13. Relator Edward 1. O'Donnell is a resident of the State of Pennsylvania. From 2003 to 2009, Relator was employed by Countrywide Home Loans, first as a Senior Vice President, and later as an Executive Vice President. 14. Defendant Countrywide Financial is a Delaware corporation with its principal place of business in Calabasas, California. Countrywide Financial, itself or through its subsidiary Countrywide Home Loans, was engaged in mortgage lending. On July 1, 2008, Countrywide merged with Bank of America and is now a wholly-owned subsidiary of Bank of America. Countrywide Financial's remaining operations and employees were transferred to Bank of America, and Bank of America ceased using the Countrywide name in April 2009. 15. Defendant Countrywide Home Loans, a wholly-owned subsidiary of Countrywide Financial, is a New York corporation with its principal place of business in Calabasas, California. Countrywide Home Loans originates and services residential home mortgage loans by itself or through its subsidiaries. Pursuant to the merger on July 1, 2008, Countrywide Home Loans was acquired by Bank- of America and now operates under the trade name "Bank of America Home Loans." 16. Defendant Bank of America is a Delaware corporation with its principal place of business in Charlotte, North Carolina and offices and branches in New York; New York. Countrywide Financial merged with Bank of America on July 1, 2008. As explained more fully below, Bank of America is a successor-in-interest to Countrywide and has thus assumed liability for the conduct of Countrywide alleged herein. 17. Defendant Bank of America N.A. ("BANA") is a federally chartered bank and Bank of America's principal banking subsidiary. BANA has substantial business operations and 6 offices in New York, New York. As explained more fully below, BANA participated in Bank of America's acquisition of substantially all of Countrywide Financial through a series of transactions that commenced on July 1, 2008. Together with Bank of America, it is a successor-in-interest to Countrywide. BACKGROUND A. The Conservatorships of Fannie Mae and Freddie Mac 18. Fannie Mae and Freddie Mac are government-sponsored enterprises chartered by Congress with a mission to provide liquidity, stability, and affordability to the United States housing and mortgage markets. As part of this mission, Fannie Mae and Freddie Mac purchase single-family residential mortgages from lenders. Fannie Mae is located at 3900 Wisconsin Avenue, NW in Washington, D.C. Freddie Mac is located at 8200 Jones Branch Drive in McLean, Virginia. 19. The Federal Housing Finance Agency ("FHFA") is a federal agency located at Constitution Center, 400 7th Street, SW in Washington, D.C. FHFA was created on July 30, 2008, pursuant to the Housing and Economic Recovery Act of 2008 ("HERA"), Pub. L. No. 110-289, 122 Stat. 2654 (2008) (codified at 12 U.S.C. ? 4617), to oversee Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. On September 6, 2008, pursuant to HERA, the Director of FHFA placed Fannie Mae and Freddie Mac into conservatorships and appointed FHFA as conservator. In that capacity, FHFA has the authority to exercise all rights and remedies of the GSEs. 12 U.S.C. ? 4617(b)(2). 20. Simultaneous with the placement of Fannie Mae and Freddie Mac into conservatorships, the United States Department of Treasury ("Treasury") exercised its authority 7 under HERA "to purchase any obligations and other securities" issued by the GSEs and began to purchase preferred stock pursuant to the Senior Preferred Stock Purchase Agreements ("PSP As"). As of December ,31" 2011, Treasury has provided $183 billion in support to the GSEs under the PSPAs. B. .:.,. Civil Statutes to Combat Mortgage Fraud 21. The False Claims Act provides liability for any person (i) who "knowingly presents, or cal:lses to be presented, a false or fraudulent claim for payment or approval;" or (ii) who "knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim." 31 U.S.C. ? 3729(a)(1)(A)-(B). 22. The False Claims Act further provides that for persons who violate the Act: "[such person] is liable to the United States Government for a civil penalty of not less than [$5,500] and not more than [$11,000] ... , plus 3 times the amount of damages which the Government sustains because of the act ofthat person ... " 31 U.S.C. ? 3729(a). 23. The Fraud Enforcement and Recovery Act of 2009 ("FERA") amended the False Claims Act to define "claim" to include: "any request or demand, whether under a contract or otherwise, for money or property ... made to a contractor, grantee, or other recipient, if the money or property is to be spent or used ... to advance a Government program or interest, and if the United States Government (i) provides or has provided any portion of the money or property requested or demanded; or (ii) will reimburse such contractor, grantee, or other recipient for any portion of the money or property which is requested or demanded ... " 31 U.S.C. ? 3729(b)(2). 24. Congress enacted FIRREA in 1989 to reform the federal banking system. Toward that end, FIRREA authorizes civil enforcement of enumerated criminal predicate 8 offenses-as established by a preponderance of the evidence-that involve financial institutions and certain government agencies. See 12 US.C ? 1833a(e). 25. As relevant to this action, FIRREA authorizes the United States to recover civil penalties for violations of, or conspiracies to violate, two provisions of Title 18 of the United States Code that "affect" federally insured financial institutions: e e 26. 18 U.S.C. ? 1341 (Mail Fraud Affecting a Financial Institution), which proscribes the use of "the Postal Service, or ... private or commercial interstate carrier" for the purpose of executing, or attempting to execute, "[a] scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises ..."; and 18 U.S.C. ? 1343 (Wire Fraud Affecting a Financial Institution), which proscribes the use of "wire ... in interstate or foreign commerce" for the purpose of executing, or attempting to execute, "[a] scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises .... ;' FIRREA provides that the United States may recover civil penalties of up to $1 million per violation, or, for a continuing violation, up to $5 million or $1 million per day, whichever is less. The statute further provides thatth~ United States can recover the amount of any gain to the person committing the violation, or the amount of the loss to a person other than the violator stemming from such conduct, up to the amount of the gain or loss. C. The GSEs' Single Family Mortgage Guarantee Business 27. In their single family business line, GSEs buy single-family mortgages from mortgage companies and other financial institutions in order to provide liquidity to the mortgage market. The GSEs then either hold the loans in their investment portfolios or bundle them into mortgage-backed securities ("MBS") that they sell to investors. 9 28. The GSEs derive revenue in their single family business line primarily from "guarantee fees," i.e., fees received as compensation for guaranteeing the timely payment of principal and interest on mortgage loans pooled into MBS. 29. The GSEs' single family mortgage business primarily acquires loans through one of two channels: (i) the lender (or flow) channel, which obtains loans from lenders on a going-forward basis pursuant to agreements to purchase loans prior to their origination; and (ii) the investor (or bulk) channel, which acquires groups of loans that have already been originated based on certain data about the loans that the GSEs review prior to purchase. 30. In purchasing loans, GSEs rely on lenders' representations and warranties that their loans comply in all respects with the standards outlined in the GSE selling guides and lender sales contracts, which set forth underwriting, documentation, quality control, and self-reporting requirements. Specifically, loans sold to Fannie Mae must comply with its Single Family Selling Guide and purchase contracts. Loans sold to Freddie Mac must comply with its Single-Family Seller/Servicer Guide and purchase contracts. 31. The purchase contracts between a GSE and a lender include both a long-term master agreement that supplements the relevant selling guide and short-term contracts that grant variances or waivers from the selling guide requirements to permit a lender to sell a specific loan product. The GSEs typically renegotiate such variances on an annual basis based on the performance of the applicable loan product and other factors, and may decide to adjust the pricing on the affected loans for the following year or eliminate the variance altogether. 32. The lenders' representations that they are underwriting and delivering investment-quality mortgages according to the GSEs' selling guide and contractual requirements 10 are material to the GSEs' decisions to purchase mortgage loans. Such representations attest to the credit quality of their loans at the time of sale, the borrower's ability to repay the loan, and the accuracy of the loan data provided. Among the most basic requirements of an investment-quality mortgage are that: (i) all required loan data is true, correct, and complete; (ii) automated underwriting conditions are met for loans processed through an automated underwriting system; and (iii) no fraud or material misrepresentation has been committed by any party, including the borrower. These requirements were in effect during the relevant time period and remain in effect today. 33. A lender must also represent and warrant that its quality control department takes certain post-closing measures intended to detect problems with loan manufacturing quality, including: (i) reviewing data integrity within automated underwriting systems; (ii) re-verifying underwriting decision and documents; (iii) re-verifying fieldwork documents (including as to appraisal and title); (iv) reviewing closing and legal documents; and (v) conducting regular reviews of internal controls relating to loan manufacturing quality and fraud prevention. These requirements were also in effect during the relevant time period and remain in effect today. 34. The GSE guidelines are consistent with Countrywide's own underwriting guidelines, which are set forth in two main documents: the Loan Program Guides ("LPGs") and the Countrywide Technical Manual ("CTM"). The LPGs set limits on loan characteristics, such as loan-to-value ratios ("LTVs"), loan amounts, and reserve requirements for specific loan types. The CTM contains processes and instructions for originating loans, such as how to .calculate LTV s. 35. The CTM states that Countrywide's basic policy is to "originate and purchase investment quality loans," with such a loan defined as "one that is made to a borrower from whom 11 timely payment of the debt can be expected, is adequately secured by real property, and is originated in accordance with Countrywide's Technical Manual and Loan Program Guides." CTM 0.4 Introduction -Countrywide's Underwriting Philosophy. 36. When a GSE identifies a material breach of a warranty, usually during a post-default quality review of a loan, it may demand that the lender repurchase the loan and/or reimburse the GSE for any loss already incurred. Where a lender identifies a material breach of a selling warranty on its own, it must self-report the loan to the GSE. C. The Loan Origination Process within Countrywide's FSL Division in 2007 37.. The loan origination process in FSL, as in other Countrywide divisions, frequently used Countrywide's automated mortgage underwriting system (called "CLUES"). CLUES was similar to other automated underWriting systems ("AUS") commonly used in the mortgage industry, such as Fannie Mae's Desktop Underwriter and Freddie Mac's Loan Prospector. Based on data entered from a borrower's application, credit report, and appraisal, CLUES evaluated a loan's default risk and whether a loan could be approved in compliance with Countrywide's guidelines. CLUES then generated a report with either an "Accept" for a loan, indicating that the loan had an acceptable level of risk, or a "Refer," indicating that the loan should be referred to a human being for manual underwriting because of a borrower's credit score or other risk attributes on the loan. 38. A CLUES report on a particular loan also listed underwriting conditions that were required to be satisfied before a loan could be closed. For example, a CLUES report might condition its "Accept" on obtaining documentation showing that certain of the borrower's debts 12 had been paid off, documentation of the borrower's employment and assets, or review of certain assumptions supporting an appraisal. 39. Further, the CLUES outcome was "only as good as the data entered into the system." See CTM 0.3.1 Introduction-Automated Underwriting Systems, Underwriting with CLUES and CLUES Documentation Levels. CLUES "Accepts" were thus "only valid if the data used to generate the recommendation matche[d] the true and accurate data in the file." Id. 0.2.1 Introduction-Countrywide's Underwriting Philosophy. Accordingly, the quality of loans originated ultimately depended on the individuals processing and underwriting the loans. 40. Within FSL as of early 2007, the loan origination process required the involvement of four individuals: the loan specialist (also called a loan processor), the underwriter, the loan funder, and the compliance specialist. 41. The loan specialist within FSL entered borrower information into CLUES and, after obtaining a result, forwarded the loan file to an underwriter for review. Loan specialists within FSL were primarily data entry clerks, were not permitted to answer any substantive borrower questions about a loan, and did not have authority to perform any underwriting tasks .. 42. The underwriter determined the likelihood that the borrower could repay the mortgage loan, by: (i) verifying that loan documentation was true, complete, and accurate by _. comparing the underlying loan documentation with data entered into CLUES; (ii) evaluating documentation concerning the borrower's income, assets, employment, and credit history; (iii) evaluating the appraisal; (iv) analyzing relevant GSE requirements; and (v) reviewing and clearing any conditions listed on a CLUES report until the loan was "cleared to close." 13 43. The underwriter also served a valuable fraud detection role. Specifically, the underwriter could detect whether a loan 'specialist entered fraudulent data into CLUES by comparing the loan documentation with the data entered by the loan specialist. The underwriter was also key to detecting fraud in stat~d }ncome loans-those in which a borrower is not required to provide documentation supporting her income. Where a borrower provides no supporting documentation of income, the determination as to whether the borrower's stated income is reasonable in view of her employment and other factors is best made by a qualified, experienced underwriter. 44. The loan funder prepared the loan package for closing, coordinated the return of closing documents for review prior to funding, ensured that any unresolved funding conditions were satisfactorily met, and wired funds to title companies or closing agents. 45. The compliance specialist acted as a final "toll gate" prior to funding, by conducting a review of the loan file to: (i) ensure that any conditions imposed by CLUES were . properly satisfied; (ii) verify borrower identification and execution of loan documents; (iii) confirm the availability of funds to be paid to the borrower or third parties; and (iv) ensure compliance with relevant state lending requirements. 46.. As of early 2007, each of the four individuals involved in the loan origination process received a bonus based both on the quality and on the volume of loans processed. D. The Shift in Focus to Prime, Conventional Lending in 2007 47. In the spring of 2007, the secondary market for subprime loans collapsed, and several subprime lenders announced significant losses, declared bankruptcy, or put themselves up 14 for sale. With the collapse of the subprime market, lenders sought to originate loans that they could then sell to the GSEs. 48. The GSEs, for their part, began to observe escalating default rates in previously-purchased loans and responded by tightening their requirements and curtailing the pur'chase of riskier loans. The GSEs also communicated their tightening requirements to lenders. As one former Fannie Mae executive explained the changing expectations in mid-2007, Fannie Mae was nearly the only significant purchaser left in the secondary market ,and was working hard to provide liquidity to the market, so it expected lenders to pay closer attention to loan quality. 49. Because Fannie Mae was purchasing approximately one-third of its single-family mortgage business from Countrywide in 2007, it initiated a careful review of the Countrywide portfolio beginning in May 2007, and a few months later directed its employees to "reduce[] the existing level of risk by pulling back on products and variances." 50. Similarly, as loan default rates continued to climb, Freddie Mac re-priced, then eliminated, approximately half of Countrywide's riskier loan program products in 2007 and 20.08. 51. Well aware that the' GSEs were increasingly concerned about the quality of loans they were purchasing, Countrywide represented to individuals at both Fannie Mae and Freddie Mac that it had implemented tighter underwriting guidelines in the fourth quarter of 2007. 52. At the same time, Countrywide was seeking to generate much-needed revenue from loan sales and transition itself back into the prime, conventional lending market. FSL thus began directing an increasing percentage of sales to the GSEs in 2007, and by early 2008 its transition was effectively complete. FSL's production by the first quarter of 2008 consisted of more than 90% conventional loans and other GSE-approved products. Simultaneous with its shift in focus 15 to prime lending, FSL implemented a new "streamlined" origination model designed to reduce "tum time," i.e., the amount of time spent underwriting and processing loans, and thus boost volume and revenue. 53. Countrywide did not disclose its new loan origination model to the GSEs. COUNTRYWIDE'S SCHEME TO DEFRAUD THE GSEs A. The Hustle Eliminated Quality Control Processes 54. After a pilot test in 2006 led by two senior managers transferred from Countrywide's Consumer Markets Division, FSL fully implemented its new model for loan origination-the "Hustle"-in mid-2007. The Hustle (or "HSSL") was the term for FSL's new "High Speed Swim Lane" model for loan origination. Operating under the motto, "Loans Move Forward, Never Backward," the Hustle aimed to reduce the amount of tum time on loans. 55. To achieve their aim, FSL executives eliminated what they deemed to be unnecessary "toll gates" slowing down the loan origination process, which included processes necessary for originating investment-quality loans and for preventing fraud. 56. For example, the Hustle eliminated review by underwriters for all but the riskiest loans. Under the Hustle, if a loan processed through CLUES generated an "Accept" rating, regardless of the conditions imposed by CLUES, the loan could proceed to closing without any underwriter involvement. 57. The Hustle's removal of underwriters and other "toll gates" extended to a variety of full and reduced documentation loan products, including such high risk loans as stated income loans. 16 58. During a pilot test of the Hustle in 2006, FSL initially regarded stated income loans as too risky to be included in an underwriter~free loan origination process. As internal Countrywide loan performance reviews indicate, stated income loans defaulted earlier and more frequently than loan products requiring full documentation of the borrower's income. For this reason, Countrywide had imposed lower loan amount limits and other restrictions on stated income loans. 59. The GSEs also expected that only experienced underwriters would be entrusted with review of stated income loans. For instance, Freddie Mac guidance on preventing stated income fraud provides that "[s]tated income loans can be problematic if it is later determined that the stated income was misstated and that the originator knew or should have known about it earlier in the process ... " and that to prevent such fraud, lenders should "[e]nsure the most seasoned underwriters on your team underwrite stated income loans." 60. In 2007, however, stated income products still represented nearly 40% of FSL's overall volume. Consequently, FSL was unlikely to achieve its desired production boost unless stated income loans were included in the high speed swim lane. By the summer of 2007, therefore, FSL removed underwriters even from stated income loans. 61. With underwriters eliminated from most loan reviews, lo'an specialists assumed responsibility for a variety of critical underwriting tasks on full and reduced documentation loans. Although previously regarded as unqualified even to answer borrower questions, loan specialists were suddenly entrusted with assessing the reasonableness of a borrower's stated income and evaluating the adequacy of an appraisal. 17 62. Even while the Hustle gave loan specialists authority previously available only to underwriters, it provided them with less guidance in performing critical underwriting tasks. For example, FSL previously required its underwriters to complete certain worksheets-referred to as "job aids"-that served as checklists or how-to forms on performing critical underwriting tasks. 63. Under the Hustle, however, these job aids were regarded merely as additional, unnecessary toll gates, so they, along with underwriters, were eliminated. Among the job aids deemed unnecessary were worksheets on how to assess the reasonableness of stated income and how to review an appraisal. 64. The Hustle also eliminated the final toll gate in loan origination-the compliance specialist-who previously checked to ensure that any conditions on the loan were cleared prior to closing and funding the loan. As a result, loans receiving a CLUES "Accept" were handled entirely by loan specialists and funders. 65. Finally, to further incentivize loan specialists and funders to reduce the time spent processing the loans, FSL changed the compensation structure for both loan specialists and funders. After a pilot test of the Hustle revealed that loan specialists were hesitant to make underwriting decisions for fear their errors would lead to higher defect rates and a correspondingly lower bonus, FSL eliminated any quality component to bonuses altogether. As a result, loan specialists and funders earned bonus compensation based purely on loan volume and had no incentive to safeguard loan quality. 66. Countrywide knew that its removal of toll gates violated GSE requirements, which mandated heightened scrutiny of loan quality beginning in mid-2007. As one former Fannie 18 executive explained, Countrywide's revised, toll gate-free origination process drastically departed from what was deemed acceptable in the tightening market of mid-to-late 2007. B. Countrywide Ignored Warnings Raised about the Hustle 67. As explained below, certain individuals within FSL repeatedly warned FSL executives, including FSL's President, Greg Lumsden, and FSL's Chief Operating Officer ("COO"), Rebecca Mairone, that the Hustle would generate excessive quantities of fraudulent or otherwise seriously defective loans that were ineligible for sale to the GSEs. These warnings, however, were ignored and the Hustle was rolled out as planned. After the roll out began, internal quality control reviews of Hustle loans were provided to FSL executives, including Lumsden and Mairone. These reviews confirmed that, as predicted, the quality of the loans originated under the Hustle was exceptionally poor. Again, however, FSL executives ignored this information, continued on with the Hustle as planned, and restricted dissemination of the quality reviews. 68. Some FSL seni9r managers, including O'Donnell, warned that the Hustle presented a disastrous layering of risk by: (i) eliminating the toll gates (e.g., underwriters, job aids, and compliance specialists) responsible for loan quality and fraud prevention; (ii) expanding the authority ofloan specialists and funders, and (iii) compensating loan specialists and funders solely based on volume. 69. Concerned about the high defect rates from the pilot tests of the Hustle and a rapid deterioration in loan quality, O'Donnell directed some of the underwriters to conduct quality checks on the Hustle loans pre-~ding, in the hope that defects could be corrected. FSL's COO permitted these quality checks as long as they were conducted on a parallel track with the loan processing, so that they would not "slow[] the swim lane down." 19 70. The resulting pre-funding quality control reports conducted by O'Donnell's teams revealed a staggering rate of defects and predicted systemic problems in loan quality. According to FSL's own internal reports, in January 2008, FSL's rates of materially defective loans were 57% overall, and nearly 70% for stated income loans. The most frequently-cited defects appeared where job aids had been removed, including in the areas of stated income reasonableness and appraisal acceptability. 71. Rather than alter or abandon the Hustle model, FSL's COO prohibited O'Donnell's teams from circulating the pre-funding quality reports outside ofFSL. C. Countrywide Concealed the Escalating Rates of Defects and Fraud under the Hustle 72. As warnings about the Hustle went unheeded, Countrywide knowingly churned out loans with escalating levels of fraud and other serious material defects and sold them to the GSEs. 1. Fraudulent Manipulation of Data 73. With loan processors and funders encouraged to focus only on the volume ofloans they processed, falsification of CLUES data proceeded unchecked. As set forth above, an "Accept" was reliable only to the extent that a loan processor had entered the data accurately into CLUES in the first instance. Under the Hustle, however, loan processors were incentivized to, and repeatedly did, manipulate borrower information (e.g., by entering a higher income for the borrower) until they received an "Accept" and the loan could enter the high speed swim lane. And no underwriter reviewed the loan to compare the CLUES data with the underlying loan documentation to detect fraudulent manipulation. Even in post-closing audits where fraudulent manipulation of data was found, such a finding was typically recorded as another material defect finding that had no effect on the loan processor's compensation. As a result, the number of 20 CLUES reports per loan (i. e., reports generated by processing a loan through CLUES that show the result and any conditions attached to the result) escalated dramatically under the Hustle.' 74. A few CLUES reports per loan would not be atypical or suspicious because a loan processor was required to enter correct and accurate data into CLUES at all times, requiring updates (and hence additional CLUES reports) ifthere were changes to the borrower's information prior to closing. More than a few CLUES reports per loan, however, is a strong indicator that a processor or underwriter is simply altering data to obtain an "Accept" and therefore engaging in fraud. 75. Under the Hustle, and specifically between May 2007 and November 2008 (after the acquisition of Countrywide by Bank of America in July 2008), the average number of CLUES reports per FSL loan clirribed from 8-already a suspiciously high number-to 14. In 2007 alone, nearly 60% of FSL loans sold to Fannie Mae that later defaulted had 10 or more CLUES queries. 76. Countrywide management only intensified the push to obtain a CLUES "Accept" result. As an August 22, 2007 email to FSL management explained in discussing Countrywide'S "Fast & Easy" loan product (a reduced documentation loan), "[t]here is major CHL corporate scrutiny on ensuring prime F&E's fund as Accept due to market liquidity and ensuring loan is salable to GSE-FNMA ... all we simply have to do is ... fix data pre-fund[ing,] re-run CLUES and then [] not run CLUES again so we can fund as CLUES Accept. Please remember the F&E product is key to HSSL ... but MUST be, CLUES Accept AT FUNDING!" 77. As one former FSL Senior Vice President explained, although manipulation of CLUES data was always a risk, it became an unmitigated risk under the Hustle and, even when 21 detected, loan processors manipulating data typically faced no consequences, monetary or otherwise. 2. Loans Closed with Outstanding Conditions 78. As set forth above, the GSEs require a lender to represent that automated underwriting conditions are met for all loans processed through an automated underwriting system. Likewise, Countrywide'S own underwriting guidelines provide that "[a]l1 of the conditions imposed by CLUES must be completely fulfilled. The fact that a loan has a CLUES Accept rating does not release the branch from validating that all documentation meets prescribed requirements." CTM 0.3.1 Introduction-Automated Underwriting Systems (AUSs), Underwriting with CLUES and CLUES Documentation Levels. 79. With volume driving compensation under the Hustle, loan processors had no incentive to obtain and review necessary documents prior to closing. 80. As a result, during the Hustle years, FSL experienced a sharp increase in the percentage of loans closed with a variety of outstanding conditions and a doubling of the percentage of loans closed without required critical documentation, such as documentation supporting income, verifying assets, and verifying employment. 3. Spiking Material Defect Rates 81. Countrywide's own post-closing quality control reports indicated that the Hustle was a disaster. Countrywide's post-closing quality reports revealed an alarming spike in defect rates in FSL loans after the Hustle was fully implemented in or around August of2007. Although FSL's material defect rates had historically been lower than those in other Countrywide divisions, such as its Consumer Markets Division and Wholesale Lending Division, Countrywide's internal 22 reports show that FSL's material defect rates reached double the levels of those in other divisions in 2008. 82. By the first quarter of 2008, FSL's material defect rate on loans climbed to nearly 40%, far surpassing the industry standard defect rate of 4-5%. Put simply, according to Countrywide's own internal quality control reviews, more than one-third of the loans FSL originated were ineligible for sale to investors like the GSEs. 4. Countrywide's Concealment of Defect Rates 83. Well aware that its defect rates drastically exceeded the industry standard, Countrywide concealed them from the GSEs. One former Fannie Mae executive responsible for Countrywide purchases explained that he could not recall ever hearing defect rates like those at Fannie Mae, and added that had he known about such defect rates, he would have asked what Countrywide was originating and whether there were any quality checkpoints at all in the origination process. Another former Fannie Mae executive responsible for the Countrywide account commented that, whereas a lot of customers trying to sell to Fannie Mae would self-report a problem they identified, he could not recall Countrywide ever reporting a single issue as to quality to Fannie Mae. 84. Indeed, at the same time FSL's defect rates soared to approximately 37%, Countrywide was advised that its poor loan quality could threaten the Bank of America acquisition. A report prepared in February 2008 by Enterprise Risk Management alerted Countrywide executives that the number two credit risk that could disrupt the Bank of America acquisition was Countrywide's material defect rates, which were described across divisions as "significantly above acceptable levels, with the most common [defect] being unreasonable stated 23 income." The number one credit risk cited by the report was Countrywide's high rates of early payment defaults, i. e., loans defaulting within the first six months, which are also correlated with material defects and fraud. 85. Despite its knowledge that its defect rates were well above acceptable levels, FSL took no action to address the root cause of its staggering defect rates. Instead, FSL offered its quality control employees a one-time bonus in the first quarter of 2008 for rebutting material defect findings down to a more standard rate. 86. In a typical rebuttal process, an initial quality review would be conducted of a loan by Countrywide's corporate quality control department. Where a defect finding was made, the :'7'? .. quality control team within the division that originated the loan had an opportunity to address the finding by, e.g., attempting to locate a key document missing from the loan file. 87. In FSL, however, where employees were paid to rebut the defect findings of the corporate quality control department, FSL employees were able to "rebut" defect findings even without taking any corrective action or showing that the finding was made in error. For example, FSL employees could "rebut" defect findings of "unreasonable stated income" simply by arguing that the stated income was reasonable. In such cases, unless the corporate quality control employee could prove the stated income was false, the defect finding was overturned. 88. Indeed, one former corporate quality control employee previously testified that she could not recall any instances when a finding of "unreasonable stated income" was not overturned. 89. The -FSL bonus incentive had its desired effect. Internal FSL quality control reports show that the defect rate for February 2008, for example, went from approximately 37% to purportedly 13%. 24 90. Countrywide also concealed its bonus incentive from the GSEs. As a former Fannie Mae Vice President of Credit Risk explained, he had never heard of any lender that incentivized a quality control team to rebut quality control findings. Another former Fannie Mae executive commented that it was misleading for Countrywide to be representing, on the one hand, that it was tightening its underwriting controls, while simultaneously engaging in a game of "catch - me if you can" on the quality control side. D. Countrywide Misrepresented That its Loans Complied with GSE Requirements 91. Hustle loans sold to GSEs violated the most basic representations made at the time of sale, including: (i) that all required loan data was true, correct, and complete; (ii) that CLUES .conditions were met prior to closing; and (iii) that no fraud or material misrepresentation had been committed by any party, including the borrower. 92. Even more fundamentally, according to Countrywide's Guidelines, "[t]he basic question every underwriter should ask on every loan is, 'Does this loan make sense?'" CTM 0.6 Introduction-Loan Fraud. The loans described below are just a small fraction of those that fail this basic test. Although each of the described loans contained obvious and easily detectable material defects, each one was sold to Fannie Mae with the representation that it was an investment-quality loan and was therefore not reviewed by Fannie Mae until after its default. 1. The Altadena, California Property 93. Fannie Mae loan number 1706211714 relates to a property in Altadena, California (the "Altadena Property"). The mortgage closed on or about October 24, 2007. Countrywide sold the loan to Fannie Mae with the representation that it complied with the applicable GSE requirements. 25 94. Contrary to Countrywide's representation, the loan did not comply with the most basic GSE requirements concerning accuracy of loan data and the absence of any misrepresentations. A post-default quality review revealed an obvious misrepresentation of income, where the loan application represented that the borrower earned $8,500 per month as the self-employed owner of a company with a name identical to that of the borrower, when no such company existed. 95. The quality review also found a grossly inflated appraisal of the underlying property, overstating the value of the property by 31 %, and an inadequate documentation of the borrower's assets. 96. Countrywide's representation that this loan complied with GSE requirements was material to Fannie Mae's decision to purchase- the loan and bore upon the likelihood that the borrower would make mortgage payments. 97. The loan defaulted within ten months of closing. The loan was processed through CLUES 58 times, which by itself suggests fraudulent manipulation of data. Further, according to Countrywide's (later Bank of America's) internal fraud tracking system, which recorded the results of internal investigations of possible cases of loan fraud, the investigation confirmed fraud in connection with the loan. 2. The Miami, Florida Property 98. Fannie Mae Loan number 1704851176 relates to a property in Miami, Florida. The mortgage closed on or about August 25, 2007. Countrywide sold the loan to Fannie Mae with the representation that it complied with the applicable GSE requirements. 26 99. Contrary to Countrywide's representation, the loan did not comply with the most basic GSE requirements concerning accuracy of loan data and the absence of any misrepresentations. A post-default quality review revealed misrepresentations of employment and income, where the loan file stated that the borrower was a sales representative for Florid.a West Airlines earning $15,500 per month, but the borrower was in fact employed by a temporary agency and'earned $2,666 per month. 100. The quality review also found a misrepresentation of the borrower's credit in the form of undisclosed liabilities, where the borrower's recent credit report and bankruptcy petition revealed six debts not disclosed on the loan application. Finally, the quality review found no documentation verifying the borrower's employment and income, as was required by CLUES conditions on the loan. 101. Countrywide's representation that this loan complied with GSE requirements was' material to Fannie Mae's decision to purchase the loan and bore upon the likelihood that the borrower would make mortgage payments. 102. The loan defaulted within seven months of closing. Countrywide's (later Bank of America's) internal fraud investigation confirmed fraud in connection with the loan. 3. The Athens, Alabama Property 103. Fannie Mae loan number 1706212486 relates to a property in Athens, Alabama. The mortgage closed on or about September 27,2007. Countrywide sold the loan to Fannie Mae with the representation that it complied with the applicable GSE requirements. 104. Contrary to Countrywide's representation, the loan did not comply with the most basic requirements concerning accuracy of loan data and the absence of misrepresentations. A 27 post-default quality review found misrepresentations of employment and income, where the loan file stated that the borrower was self-employed as the owner of a brokerage company earning $15,000 per month, but in fact the borrower was a former employee of the company whose employment ended nine months prior to the closing date. 105. Countrywide's representation that this loan complied with GSE requirements was material to Fannie Mae's decision to purchase the loan and bore upon the likelihood that the borrower would make mortgage payments. 106. The loan was processed through CLUES 29 times and Countrywide's (later Bank of America's) internal fraud investigation confirmed fraud in connection with the loan. 4. The Birmingham, Alabama Property 107. Fannie Mae loan number 1704789372 relates to a property in Birmingham, Alabama. The mortgage closed on or about August 31, 2007. Countrywide sold the loan to Fannie Mae with the representation that it complied with the applicable GSE requirements. 108. Contrary to Countrywide'S representation, the loan did not comply with the most basic requirements concerning accuracy of loan data and the absence of misrepresentations. A post-default quality review found inadequate documentation of income, where the loan file stated that the borrower earned $10,000 per month as a self-employed real estate investor, but contained no requisite verification of the borrower's business. 109. The quality review also found a misrepresentation of the borrower's credit where the borrower had an undisclosed liability. Specifically, the borrower had obtained an additional mortgage prior to closing, resulting in an additional $81,000 of undisclosed debt. Finally, the 28 quality review found an inadequate documentation of assets; where the loan file contained no requisite evidence of the borrower's source or funds to close the loan. 110. Countrywide's representation thatthis loan complied with GSE requirements was material to Fannie Mae's decision to purchase the loan and bore upon the likelihood that the borrower would make mortgage payments. 111. The loan defaulted within twelve months of closing. Countrywide's (later Bank of America's) internal fraud investigation confirmed fraud in connection with the loan. 5. The Chowchilla, California Property 112. Fannie Mae loan number 1705530483 relates to a property in Chowchilla, California. The mortgage closed on or about November 26, 2007. Countrywide sold the loan to Fannie Mae with the representation that it complied with the applicable GSE requirements. 113. Contrary to Countrywide's representation, the loan did not comply with the most basic requirements concerning the absence of misrepresentations and the clearing of conditions imposed by an automated underwriting system. A post-default review found that the appraisal failed to comply with GSE requirements, containing a misrepresentation of the physical characteristics of the subject property, a misrepresentation of the declining home values in the neighborhood, and a failure to use appropriate comparable sales. The quality review also revealed missing documentation of verification of employment and income, as was required by CLUES conditions on the loan. 114. Countrywide's representation that this loan complied with GSE requirements was material to Fannie Mae's decision to purchase the loan and bore upon the likelihood that the borrower would make mortgage payments. 29 115. Countrywide's (later Bank of America's) internal fraud investigation confirmed fraud in connection with the loan. 6. The Tampa, Florida Property 116. Fannie Mae loan number 1705152888 relates to a property in Tampa, Florida. The mortgage closed on or about October 12,2007. Countrywide sold the loan to Fannie Mae with the representation that it complied with the applicable GSE requirements. 117. Contrary to' Countrywide's representation, the loan did not comply with the most basic requirements concerning the accuracy of data and the absence of misrepresentations. A post-default quality review revealed a misrepresentation of income, where the loan file stated that the borrower earned $8,000 per month as a nurse, but the borrower in fact earned $4,112 per . month. 118. The quality review also revealed an appraisal that failed to comply with GSE requirements based on a misrepresentation of the number of square feet of the subject property, a misrepresentation of the declining home values in the neighborhood, and a failure to use appropriate comparable sales. 119. Countrywide's representation that this loan complied with GSE requirements was material to Fannie Mae's decision to purchase the loan and bore upon the likelihood that the borrower would make mortgage payments. 120. The loan defaulted within twelve months after closing. Countrywide's (later Bank of America's) internal fraud investigation confirmed fraud in connection with the loan. 30 7. The Blue Ridge, Georgia Property 121. Fannie Mae loan number 1704683304 relates to a property in Blue Ridge, Georgia. The mortgage closed on or about August 27, 2007. Countrywide sold the loan to Fannie Mae with the representation that it complied with the applicable GSE requirements. 122. Contrary to Countrywide's representation, the loan did not comply with the most basic requirements concerning the accuracy of data and the absence of misrepresentations. A post-default quality review revealed a misrepresentation of income, where the loan application stated that the borrower was self-employed as the president of a real estate company for three years and earned $12,000 per month. In fact, a bankruptcy petition filed by the borrower in August of 2008 revealed that his monthly income at the time of closing was $3,333 per month. 123. The quality review also revealed potential appraisal fraud, as two separate appraisals appeared in the loan file. Although the loan was approved based on an appraised property value of$430,000, the loan file contained a second appraisal reflecting an appraised value of $348,000. The loan file contained no explanation regarding the reason two appraisal reports were obtained or documentation supporting the higher value. Further, a field review that was conducted as part of the quality review supported the lower value Qf$348,000. 124. Countrywide's representation that this loan complied with GSE requirements was material to Fannie Mae's decision to purchase the loan and bore upon the likelihood that the borrower would make mortgage payments. 125. The loan defaulted within nine months after closing. Countrywide's (later Bank of America's) internal fraud investigation confirmed fraud in connection with the loan. 31 E. Countrywide and Bank of America Intentionally Thwarted the Repurchase Process 126. Countrywide, and later Bank of America; compounded the financial harm to the GSEs by refusing to repurchase loans even where the GSEs identified obvious misrepresentations of income, unacceptable appraisals, and other material defects in Hustle loans. 127. Countrywide's thwarting of the repurchase process predates the Hustle. As a June 15,2007 memo to the former Fannie Mae CEO noted regarding the Countrywide relationship, a "major continuing problem is Countrywide's refusal to repurchase or make us whole on loans which have suffered losses due to their admitted defects." And as a former Fannie Mae senior manager previously testified, Countrywide had always exhibited a "blatant disregard for just ignoring the repurchase requests." 128. Countrywide's misconduct in the repurchase process continued unabated during the Hustle time period and extended to Hustle loans. For example, even where Fannie Mae confirmed instances of misrepresentation of stated income, Countrywide and Bank of America . refused to repurchase loans, contending that the stated income, even though fraudulently misrepresented, was reasonable. And even where Fannie Mae's quality reviews revealed inflated or otherwise faulty appraisals on the basis of misrepresentations about the subject property, Countrywide and?B8nk of America refused to repurchase loans, contending that Fannie Mae failed to demonstrate that the faulty appraisal caused the loan to default. As a former Fannie Mae senior manager during the relevant time period stated, Countrywide's attitude was one of total intransigence, refusing to repurchase loans even when it was clear that there was fraud in connection with the loan. 32 129. Countrywide's and Bank of America's refusal to repurchase defective Hustle loans has resulted in more than $1 billion in unreimbursed losses for the GSEs. F. Defendants' Fraud Affected Federally Insured Financial Institutions 130. The knowing and intentional fraud perpetrated by Countrywide and Bank of America des<;:ribed herein has affected the investors in the GSEs who incurred stock losses and unpaid dividends resulting from the GSEs' financial distress. 131. The investors? in the GSEs include numerous federally insured financial institutions, including nine former subsidiaries of FBOP Corporation ("FBOP"), a privately held bank holding company headquartered in Oak Park, Illinois. The subsidiaries of FBOP that invested in the GSEs were Cal National Bank, Park National Bank, San Diego National Bank, Pacific National Bank, North Houston Bank, Madisonville State Bank, BANK USA, Community Bank of Lemont, and Citizens National Bank. 132. Prior to September 2008, FBOP had more than $18 billion in assets through its nine subsidiaries. As the GSEs began to suffer increasingly large losses resulting from non-performing loans (purchased from Countrywide as well as other lenders) that were pooled in their mortgage-backed securities or held in their investment portfolio, the GSEs' stock price declined precipitously, negatively impacting the nine FBOP subsidiaries as well as other investors in the GSEs. 133. On September 7, 2008, the placement of Fannie Mae and Freddie Mac into conservatorship wiped out virtually all of the value of the outstanding preferred stock in the two companies. As a result of the conservatorship, FBOP's subsidiary banks suffered an $885 million 33 loss on their investments in the GSEs' preferred securities. Immediately following the conservatorship, FBOP's four largest subsidiaries fell below "well capitalized" standards. 134. On October 30, 2009, FBOP's subsidiaries were closed due to inadequate capitalization and the Federal Deposit Insurance Corporation was appointed as their receiver. 135. Other federally insured financial institutions were similarly affected by the Defendants' fraud, which contributed to the financial distress (and conservatorship) of the GSEs, and, in turn, caused losses to the preferred stockholders in the GSEs. For example, BankFinancial Corporation (an Illinois banking corporation) and Cascade Financial Corporation (a Washington banking corporation) both reported losses on their shares of preferred stock in the GSEs for the quarter ending September 30, 2008. 136. Defendants executed their scheme to defraud the GSEs through the use of interstate mail and wires. BANK OF AMERICA IS LIABLE BOTH DIRECTLY AND AS SUCCESSOR TO COUNTRYWIDE 137. Bank of America is directly liable for the conduct alleged above that occurred after July 1, 2008, and liable as the successor to Countrywide for the conduct alleged above that occurred prior to July 1, 2008, under the doctrines of de/acto merger and assumption of liabilities. A. De Facto Merger 138. Bank of America effected a de facto merger with Countrywide because: (i) former Countrywide shareholders became Bank of America shareholders, and remained owners of Countrywide Financial and its subsidiaries following the merger; (ii) Bank of America assumed the ordinary business liabilities necessary for the ongoing operations of Countrywide'S core 34 businesses, including mortgage origination and servicing; and (iii) Bank of America continues to operate the combined mortgage business out of the same offices formerly occupied by Countrywide, has employed a substantial number offormer Countrywide employees to continue to manage and operate the businesses, and continues to use Countrywide's operational assets in the combined business. 139. Countrywide Financial's core business was originating, purchasing, selling, and servicing loans, and was primarily housed within Countrywide Home Loans. Countrywide Home Loans owned all of the assets necessary to? the operations of the mortgage business, including the non-banking financial centers, technology platform, physical offices, call centers, and equipment used in the mortgage origination and servicing business. Countrywide Bank, FSB, held customer deposits, invested in mortgage loans originated through Countrywide Home Loans, and by the end of2007, originated the vast majority of Countrywide's mortgages. 140. On January 11,2008, Countrywide Financial and Bank of America announced that they had entered into a Merger Agreement. In the six months following the announcement of the planned merger, Bank of America developed a plan to integrate Countrywide's businesses into Bank of America through a series of transactions by which Bank of America would acquire control over, then transfer to itself, all of Countrywide's productive assets, operations, and employees (the "Plan"). 141. The 'goal of the Plan was to consolidate as much of the mortgage business of Countrywide and Bank of America as possible. In April of 2008, Bank of America stated before the Federal Reserve that it would "run the combined mortgage business" under the "Bank of 35 America brand" and that Calabasas, California would "be the national headquarters for the combined mortgage business." 142. As set forth below, the execution of the Plan began just after the July 1, 2008 merger. The Plan continued the former Countrywide Financial stockholders' ownership over Countrywide Financial's assets, then transferred all mortgage-related assets of the Countrywide entities into Bank of America entities through a series oftransactions in July and November 2008. 143. Following the merger, the Plan was completed in several steps because some transactions required regulatory approval while others could be completed immediately. 1. The Red Oak Merger 144. On July 1,2008, Countrywide Financial merged into a specially-formed Bank of America subsidiary named Red Oak Corporation, which was then renamed Countrywide Financial Corporation (the "Red Oak Merger"). The Red Oak Merger was a stock-for-stock transaction by which former Countrywide Financial shareholders became Bank of America shareholders. 145. Since the Red Oak Merger, Countrywide Financial and its other wholly-owned subsidiaries have been owned by the shareholders of Bank of America (which then included former Countrywide Financial shareholders through their ownership of stock of Bank of America). Also, as of the Red Oak Merger, both before and after the July and November 2008 transactions, Bank of America was the sole shareholder of Countrywide Financial and its subsidiaries. 146. Since the Red Oak Merger, Bank of America has controlled Countrywide Financial, Countrywide Home Loans, and all other former subsidiaries of Countrywide Financial. 147. As Bank of America has acknowledged in recent briefing, it was required by Fannie Mae guidelines to obtain Fannie Mae's consent to the Red Oak Merger "[t]o .ensure [its] 36 protection in a sale of a mortgage servicer that was servicing mortgage loans that Fannie Mae ... owned." As a condition to its consent to the Red Oak Merger, Fannie Mae required that BANA guarantee the obligations of Countrywide Home Loans Servicing LP ("CHLS"), a Countrywide Home Loans subsidiary, to service loans that Fannie Mae had purchased. 2. The July 2008 Transactions 148. Between July 1 and July 3, 2008, Countrywide Financial and Bank of America engaged in a number of transactions by which Countrywide Financial and its subsidiaries sold assets and subsidiaries to Bank of America and certain of its subsidiaries. 149. On July 1,2008, Countrywide Home Loans sold two pools of residential mortgage loa:ns to NB Holdings Corporation ("NB Holdings"), a wholly-owned subsidiary of Bank of America, and novated a portfolio of derivative securities contracts to BANA, also a wholly-owned subsidiary of Bank of America, under which BANA assumed Countrywide Home Loans's positions under the contracts. 150. On July 2, 2008, Countrywide Home Loans sold to NB Holdings two entities that owned all of the partnership interests in CHLS, Countrywide's mortgage-servicing business. NB Holdings subsequently transferred CHLS to its subsidiary, BANA. 151. On July 3, 2008, Countrywide Bank sold another pool of residential mortgage loans to NB Holdings, and Countrywide Commercial Real Estate Finance ("CCREF"), a subsidiary of Countrywide Financial, sold a pool of commercial mortgage loans to NB Holdings. 3. The November 2008 Transactions 152. On November 7, 2008, pursuant to an Asset Purchase Agreement, Bank of America purchased substantially all of Countrywide Home Loans' remaining mortgage-related assets and 37 operations, including all assets associated with Countrywide Home Loans' mortgage-origination operations, including: mortgage loans; mortgage-servicing rights; the technology platform (including CLUES) used in Countrywide Home Loans' mortgage operations; furniture, fixtures, and equipment; contract rights with third parties; real property owned by Countrywide Home Loans and used in the mortgage business; mortgage servicing advance receivables; and other assets of Countrywide Home Loans used in Countrywide's mortgage business. Bank of America subsequently transferred these assets to BANA. 153. Also in November 2008, Ban1c of America purchased from Countrywide Financial its 100% equity ownership of Effinity, a Countrywide Financial subsidiary that owned Countrywide Bank, and subsequently, in April 2009, Countrywide Bank merged into BANA. 154. The net result of the November 2008 transactions was a transfer of substantially all of Countrywide Financial's and Countrywide Home Loans' remaining assets to BANA. Bank of America subsequently contributed the purchased assets and subsidiaries to its non-Countrywide Financial subsidiaries, and BANA immediately contributed billions in excess capital created by the transfers back to Bank of America. As Bank of America explained in recent briefing, "the remnants of Countrywide's mortgage business-including remaining managers, personnel, assets, and operations ... are ... in BANA." And in October of 2010, in response to an audit request directed to Countrywide Bank from the United States Department of Housing and Urban Development ("HVD"), Office of Inspector General, a representative of Bank of America responded that "Countrywide Bank, FSB ("CWB") merged into Bank of America, N.A. ("BANA") on April 27, 2009. As a result, BANA is the successor to the rights, obligations, and 38 I liabilitiesofCWB with respect to HUD and FHA [the Federal Housing Administration], including any seller/servicer numbers issued by these agencies." 4. Bank of America's Combined Mortgage Business 155. Through the series of transactions set forth above, Bank of America transferred all of the operating assets of Countrywide Financial, Countrywide Home Loans, and other Countrywide Financial subsidiaries to itself and its non-Countrywide Financial subsidiaries. 156. Bank of America integrated the former mortgage-origination business of Countrywide Financial and Countrywide Home Loans into its own mortgage business and externally branded it as Bank of America Home Loans. Countrywide Borne Loans employees became employees of Bank of America. The current Bank of America CEO testified that Bank of America "ended up with the largest [mortgage] servicing platform in the country." 157. Bank of America determines whether a Countrywide-originated loan can be repurchased, and repurchase requests by the GSEs on Countrywide-originated loans are made directly to BANA. Bank of America funds repurchases on Countrywide:..originated loans and absorbs losses on any such loans. Bank of America employees also control the negotiations and resolution of litigation involving Countrywide. 158. On April 27, 2009, Bank of America announced that the combined Bank of America Home Loans mortgage operations would be based in Calabasas, California, at the former headquarters of Countrywide Financial and Countrywide Home Loans. An April 27, 2009 Bank of America press release explained, "[t]he Bank of America Home Loans brand represents the combined operations of Bank of America's mortgage and home equity business and Countrywide 39 Home Loans, which Bank of America acquired on July 1,2008. The Countrywide brand has been retired." 159. In sum, in connection with the November 2008 transactions, Bank of America purchased substantially all of Countrywide's assets, including the technology and know-how relating to the mortgage business, and continues to use these assets in Bank of America's mortgage business today. B. Bank of America's Assumption of Liabilities 1. Bank of America's Public Admissions of Liability 160. In the months leading up to and following the Red Oak Merger, Bank of America's most senior executives and spokespersons made public statements admitting that Countrywide's liabilities were factored into the purchase of Countrywide Financial, and that Bank of America intended to "clean[] up" those liabilities. 161. For example, on March 1, 2008, a Banlc of America spokesperson said that Countrywide's liabilities were factored into the purchase of Countrywide: "We bought the company and all of its assets and liabilities ... We are aware of the claims and potential claims against the company and have factored those into the purchase." 162. In an iriterview with the New York Times for an article discussing the impact of mortgage-related loss exposure on banks, Bank of America's former CEO confirmed that Bank of America was aware of Countrywide Financial's legal liabilities and accepted them as part of the cost of the acquisition: "We did extensive due diligence. . . . It was the most extensive due diligence we have ever done. So we feel comfortable with the valuation. We looked at every 40 aspect of the deal, from their assets to potential lawsuits and we think we have a price that is a good price." 163. Addressing investor questions in November 2010, Bank of America's current CEO addressed Bank of America's plans to deal with repurchase claims and lawsuits against Countrywide by stating, "[t]here's a lot of people out there with a lot of thoughts about how we should solve this, but at the end ofthe day, we will pay for the things that Countrywide did." One month later, he told a New York Times reporter, for an article concerning Bank of America's financial woes, that "[o]ur company bought it [Countrywide] and we'll stand up, we'll clean it up." Finally, when deposed recently about his public statements, he testified that his comment to the New York Times was truthful and accurate, that "[w]e want to clean it up absolutely," and that that "was our intention then and that is our intention now." 2. Bank of America Has Paid or Funded Payment of Countrywide's Liabilities 164. Consistent with its public statements acknowledging its plan to satisfY Countrywide's liabilities, Bank of 'America (and/or BANA) has been actively engaged in negotiating and funding the resolution of disputes with the contingent creditors of Countrywide Financial and Countrywide Home Loans, including funding payments to the GSEs in January of ' 2011 in partial settlement of repurchase claims on loans originated by Countrywide, and to the United States Department of Justice in February 2012, to settle claims that Countrywide defrauded the FHA in connection with its residential mortgage loan business. 165. Bank of America has therefore assumed the liabilities of Countrywide based on its public statements by its senior officers, including its CEO, and its payment of Countrywide's contingent liabilities, contributing substantial funds to cover Countrywide's costs in connection 41 with litigations and settlements, including the settlement of representation and warranty exposure stemming from loans originated by Countrywide Home Loans and sold to the GSEs. CLAIMS FOR RELIEF COUNT I: FOR DAMAGES AND PENALTIES UNDER THE FALSE CLAIMS ACT (31 U.S.c. ? 3729(a)(I) (2006), and, as amended, 31 U.S.c. ? 3729(a)(1)(A)) 166. The Government incorporates by reference the allegations in each of the preceding paragraphs as if fully set forth in this paragraph. 167. As set forth above, Defendants knowingly, or acting iri deliberate ignorance and/or with reckless disregard of the truth, made false representations about the quality of their loans at the time of their sale of the loans to the GSEs, including that the loans were of investment quality and complied with the GSE selling guides and purchase contracts .. 168. Defendants' misrepresentations about loan quality were capable of influencing, and thus were material to, the GSEs' decisions about purchasing and/or pricing Countrywide, and later Banle of America, loans. 169. The GSEs have incurred losses as a result of Defendants' misrepresentations in the form of paying guarantees to third parties after the affected loans defaulted. 170. Treasury funds have been used to purchase Defendants' loans and to reimburse the losses incurred by the GSEs as a result of paying out guarantees to third parties after guaranteed loans purchased from Defendants defaulted. 171. Treasury funds to the GSEs were used to "advance a Government program or interest," within the meaning of 31 U.S.C. ? 3729(b)(2), specifically, to prevent disruptions in the availability of mortgage finance. 42 172. By virtue of the acts described above, and in violation of 31 U.S.C. ? 3729(a)(l)(A), for each ofthe loans sold to the GSEs in violation of GSE requirements after the effective date of FERA, Defendants knowingly, or acting in deliberate ignorance andlor with reckless disregard of the truth, presented a fraudulent claim for payment or approval. 173. Pursuant to the False Claims Act, 31 U.S.C. ? 3729(a)(l), Defendants are liable to the United States under the treble damage and civil penalty provisions for a civil penalty of not less . than $5,500 and not more than $11,000 for each of the false or fraudulent claims herein, plus three (3) times the amount of damages which the GSEs have sustained because of Defendants' actions. COUNT II: FOR DAMAGES AND PENALTIES UNDER THE FALSE CLAIMS ACT (31 U.S.c. ? 3729(a)(2) (2006), and, as amended, 31 U.S.C. ? 3729(a)(I)(B>> 174. The Government incorporates by reference the allegations in paragraphs 1-165 as if fully set forth in this paragraph. 175. As set forth above, Defendants knowingly, or acting in deliberate ignorance andlor with reckless disregard of the truth, made false representations about the quality of their loans at the time of their sale of the loans to the GSEs, including that the loans were of investment quality and complied with the GSE selling guides and purchase contracts. 176. Defendants' misrepresentations about loan quality were capable ofinfluencing, and thus were material to, the GSEs' decisions about purchasing andlor pricing Countrywide, and later Bank of America, loans. 177. The GSEs have incurred losses as a result of Defendants' misrepresentations in the form of paying guarantees to third parties after the affected loans defaulted. 43 178. Treasury funds have been used to purchase Defendants' loans and to reimburse the losses incurred by the GSEs as a result of paying out guarantees to third parties after guaranteed loans purchased from Defendants defaulted. 179. Treasury funds to the GSEs were used to "advance a Government program or interest," within the meaning of 31 U.S.C. ? 3729(b)(2), specifically, to prevent disruptions in the availability of mortgage finance. 180. By virtue of the acts described above, and in violation of 31 U.S.C. ? 3 729(a)(1 )(B), for each of the loans sold to the GSEs in violation of GSE requirements after the . effective date of FERA, Defendants knowingly, or acting in deliberate ignorance andlor with reckless disregard of the truth, made, used, or caused to be made or used, false records andlor statements material to a false or fraudulent claim presented for payment or approval. 181. Pursuant to the False Claims Act, 31 U.S.C. ? 3729(a)(I), Defendants are liable to the United States under the treble damage and civil penalty provisions for a civil penalty of not less than $5,500 and not more than $11,000 for each of the false or fraudulent claims herein, plus three (3) times the amount of damages which the GSEs have sustained because of Defendants' actions. COUNT III: FOR CIVIL PENALTIES UNDER FIRREA (18 U.S.C. ? 1833a) 182. The Government incorporates by reference the allegations in paragraphs 1-165 as if fully set forth in this paragraph. 183. For purposes of fraudulently obtaining money from the GSEs, from at least 2006 through 2010, Defendants knowingly, or acting in deliberate ignorance andlor with reckless disregard of the truth, executed a scheme and artifice to defraud, using interstate mail carriers and 44 interstate wire, in violation of 18 U.S.C. ?? 1341 and 1343. Specifically, Defendants knowingly, or acting in deliberate ignorance and/or with reckless disregard of the truth, originated loans in violation of GSE guidelines; concealed the Hustle model and the resulting defect rates on Hustle loans; and sold loans originated under the Hustle model to the GSEs while knowingly, or acting in deliberate ignorance and/or with reckless disregard of the truth, misrepresenting that they complied with the guidelines. 184. Defendants have gained substantial profits from their fraudulent scheme, having originated more than three billion dollars in loans under the Hustle. 185. This scheme to defraud has affected numerous federally insured financial institutions that held preferred stock in the GSEs, including the nine subsidiaries of FBOP Corporation that were closed due to inadequate capitalization in October of2009. 186. Accordingly, Defendants are liable for civil penalties to the maximum am9unt authorized under 12 U.S.C. ? 1833a. WHEREFORE, the Government respectfully requests judgment against Defendants as follows: a. On Counts One and Two (FCA), a judgment against all Defendants for treble damages and civil penalties for the maximum amount allowed by law; b. On Count Three (FIRREA), a judgment against all Defendants imposing civil penalties up to the maximum amount allowed by law; c. For an award of costs pursuant to 31 U.S.C. ? 3729(a); and d. For such further relief that the Court deems just. 45 Dated: New York, New York October 24,2012 PREET BHARARA United States Attorney for the Southern District of New York Attorney for the United States Assistant United States Attorneys 86 Chambers Street, Third Floor New York, New Yorlc 10007 Tel: (212) 637-2724/2528 Fax: (212) 637-2730 Email: Pierre.Armand@usdoj.gov J aimie.N awaday@usdoj.gov 46