Bank of America penalty tossed out in bad loans case

Bank of America on Monday won a reprieve from paying a $1.27 billion penalty over shoddy mortgages sold by its Countrywide arm. 

The U.S. Court of Appeals for the Second Circuit reversed a lower court decision concluding that the federal government failed to prove that there was fraudulent intent by the bank’s Countrywide Financial unit to sell risky mortgages to Fannie Mae and Freddie Mac ahead of the financial crisis.

The federal appeals court said that the Justice Department failed to present sufficient evidence for the jury to reach the 2013 decision that Countrywide and one of its executives deliberately misrepresented the quality of the mortgages they sold.

“The government did not prove — in fact, did not attempt to prove — that at the time the contracts were executed Countrywide never intended to perform its promise of investment quality,”  the appeals court said.

“Nor did it prove that Countrywide made any later misrepresentations as to which fraudulent intent could be found,” the court said.

The decision is a major blow for the federal government’s efforts to punish banks for pushing bad mortgages through the pipeline, bringing the U.S. financial system to the brink of collapse nearly eight years ago.

Government-controlled mortgage giants Fannie and Freddie needed an $188 billion taxpayer bailout to stay afloat through the financial crisis with their books bogged down with bad loans.

The loans were made in late 2007 until May 2008 through the so-called Hustle program, where it was alleged that the shoddy mortgages were moved briskly through the system and weren’t vetted for quality.

The Justice Department or the U.S. attorneys’ office in New York City, which initially filed the civil case in 2012, can appeal the decision.

The court also threw out a $1 million civil penalty against Rebecca Mairone, a former Countrywide executive.

The nation’s biggest banks have paid more than $40 billion in penalties in settlements over bad mortgages.