The suit, filed Wednesday by the top federal prosecutor in Manhattan, also underscored how Bank of America’s purchase of Countrywide in July 2008, just before the financial crisis, backfired severely.
The prosecutor, Preet Bharara, said he was seeking more than $1 billion, but the suit could ultimately recover much more in damages.
“This lawsuit should send another clear message that reckless lending practices will not be tolerated,” Bharara said in a statement. He described Countrywide’s practices as “spectacularly brazen in scope.”
Bank of America had no immediate comment.
Countrywide was a giant in mortgage lending, but was also known for approving exotic, even risky, loans. By 2007, as the market for subprime mortgages collapsed, Countrywide was anxious for revenue.
The lawsuit alleged that the company loosened its standards for making loans while telling Fannie Mae and Freddie Mac, which were buying loans from Countrywide, that standards were getting tighter.
Fannie and Freddie, which packaged loans into securities and sold them to investors, were effectively nationalized in 2008 when they nearly collapsed under the weight of their mortgage losses.
To churn out more mortgage loans, Bharara said, Countrywide introduced a program called the “Hustle,” shorthand for “High-Speed Swim Lane.” It operated under the motto, “Loans Move Forward, Never Backward.”
The program eliminated checks meant to ensure that mortgages were being made to borrowers who could afford them, according to the lawsuit.
For example, loan processors no longer had to complete worksheets that helped them assess whether income levels that borrowers entered on their loan applications were reasonable.
If processors entered a borrower’s information into a computerized underwriting program and the program raised flags, employees were encouraged to change the numbers, the suit said.