United States ex rel. O'Donnell v. Countrywide Home Loans, Inc.

Prior to the 2007–2008 financial crisis, Countrywide Home Loans, Inc. (Countrywide) (defendant) operated a subprime lending program through its Full Spectrum Lending Division (FSL). When the subprime mortgage market collapsed, Countrywide attempted to transform FSL into a prime origination division. To that end, Countrywide intended for FSL to sell prime loans to two government-sponsored entities: the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). Pursuant to Countrywide’s contracts with Fannie Mae and Freddie Mac, the mortgages were described as either acceptable investments or investment quality as of the date of delivery. Later, the federal government filed a claim in federal district court against Countrywide, Countrywide Financial Corporation, Countrywide Bank, FSB, Bank of America Corporation, Bank of America, N.A., and FSL executive Rebecca Mairone (collectively, Countrywide) (defendants) under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA). The government alleged that the mortgages were not investment quality and that Countrywide committed mail and wire fraud because Countrywide knew that the loans were of poor quality when the loans were sold to Fannie Mae and Freddie Mac. At trial, the government introduced evidence of the loans’ poor quality as well as evidence that key individuals at Countrywide knew of the loans’ poor quality. The government did not introduce any evidence of fraudulent intent involving the negotiation or execution of the contracts for the sales of the loans. The government did not identify any false communication regarding the sales of the loans or any evidence that Countrywide intended to sell substandard mortgages at the time the contracts were entered into. The government’s case relied upon Countrywide’s knowledge of the poor quality of the loans. The jury was instructed that in order to find a scheme to defraud as an element of mail and wire fraud, there had to be a false or misleading statement on Countrywide’s part and specific intent to defraud Fannie Mae and Freddie Mac. The jury returned a verdict in favor of the government, and the district court imposed civil penalties of $1 million against Mairone individually and $1.27 billion against Countrywide. On appeal, Countrywide and Mairone argued that the breach of contract via the selling of knowingly substandard mortgages was insufficient as a matter of law to support a claim of fraud absent a showing of contemporaneous fraudulent intent.