Consumer Fraud

Whistleblower may receive $1.6 million reward for exposing Countrywide mortgage fraud

osha whistle Whistleblower may receive $1.6 million reward for exposing Countrywide mortgage fraudA former Countrywide executive who exposed questionable lending practices at the company may collect a $1.6-million dollar reward under a 1989 law that was passed amid the savings and loan (S&L) crisis.

Edward O’Donnell filed a whistleblower complaint in February 2012 under the federal False Claims Act, which allows individuals to sue on behalf of the U.S. government when they have witnessed fraud against taxpayer-funded programs. In return, whistleblowers share 15 to 30 percent of the recovery. The U.S. intervened in the lawsuit in October of the same year.

Mr. O’Donnell alleges Countrywide, a division of Bank of America, fraudulently sold thousands of bad, high-risk mortgages to the government-sponsored programs Fannie Mae and Freddie Mac. Both programs suffered devastating blows when the loans defaulted.

In his lawsuit, Mr. O’Donnell says that Countrywide obtained the mortgages under a company program called the “High Speed Swim Lane,” which commenced in 2007 and involved removing most qualifications checks on mortgage applications and then rewarded employees for loan volume. Countrywide, in turn, sold all the mortgages it allegedly knew were bad to the government-sponsored programs.

Mr. O’Donnell told the court on Friday that he filed his complaint because he did not think anyone in the government was aware of Countrywide’s “High Speed Swim Lane” program, also called “Hustle” and “HSSL.”

“Because they were not aware of it, no one was being held accountable,” Mr. O’Donnell testified.

According to Reuters, however, a federal judge in N.Y. District Court dismissed the federal government’s claims under the False Claims Act. Trial proceeded because Mr. O’Donnell had filed a claim directly with the Justice Department under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) on the same day he filed the False Claims lawsuit in federal court.

FIRREA was designed in the 1980s to expose fraud in the financial industry. The law has a 10-year statute of limitations, but caps whistleblower rewards at $1.6 million – much less than the $100-million-plus reward Mr. O’Donnell would likely have received in a False Claims Act reward.

The U.S. Justice Department said it will seek $848.2 million in penalties from Bank of America under Mr. O’Donnell’s FIRREA complaint.

Many legal experts believe more financial fraud would be exposed if it weren’t for FIRREA’s relatively small reward provisions.

“If it was a 15 to 30 percent bounty provision for whistleblowers bringing claims under FIRREA, you’d see more,” one lawyer who has brought whistleblower claims against Bank of America told Reuters. As it is, the $1.6-million cap provides very little incentive to many potential whistleblowers who must risk their careers and reputations when exposing wrongdoing within their company.


Bloomberg News