Risk Management

Countrywide, Indeed: Calif., Ill. Sue

The two states allege that the giant lender's risky, complex loans deceived borrowers, and led a quest for industry dominance. A NY class action wa...
Stephen TaubJune 25, 2008

California and Illinois filed separate lawsuits against one-time mortgage giant Countrywide Financial, alleging that it engaged in deceptive practices.

The suits by the two states’ attorney generals came the same day Countrywide shareholders approved the company’s takeover by Bank of America Corp. A request by CFO.com to get comment from Countrywide on the suits was not immediately answered.

In December, New York State Comptroller Thomas DiNapoli and New York City Comptroller William Thompson were named the lead plaintiffs in a class-action lawsuit against Countrywide, the largest U.S. mortgage lender.

On Wednesday, California Attorney General Edmund G. Brown Jr. filed a suit that also named Countrywide CEO Angelo Mozilo and president David Sambol, alleging they engaged in deceptive advertising and unfair competition by pushing homeowners into mass-produced, risky loans for the sole purpose of reselling the mortgages on the secondary market.

The tactics, California alleged, produced complicated, risky, and expensive loans, which the lender then sold to third-party investors. According to the lawsuit, the company marketed the loans with low initial or “teaser” interest rates or payments. Countrywide employees — including loan officers, underwriters, and branch managers who were under intense pressure produce loans — misrepresented or obfuscated the prospect of dramatic payment increases later on, the suit charged.

“Countrywide exploited the American dream of homeownership and then sold its mortgages for huge profits on the secondary market,” Brown said. And Mozilo and Sambol “actively pushed for easing underwriting standards and granting exceptions to documentation requirements.”

In the Illinois suit, Illinois Attorney General Lisa Madigan alleged that Countrywide Home Loans Inc., and its Countrywide Financial parent engaged in unfair and deceptive conduct “on a large scale” by creating, originating, marketing, and servicing unnecessarily risky and costly mortgage loans for Illinois homeowners. Other defendants were Countrywide’s subprime lending unit, Full Spectrum Lending; its servicing arm, Countrywide Home Loans Servicing LP; and Mozilo. The suit is the result of a nine-month probe by Madigan’s office into the lending practices of Countrywide, according to the state’s announcement.

Madigan’s complaint said that Countrywide aimed to dominate the nation’s mortgage market by selling risky, costly loans to borrowers who could not afford them. As failure rates on loans began to escalate, the company intensified its originations of unaffordable and poorly underwritten loans to satisfy its obligations to Wall Street investors, it was alleged. “Countrywide’s unfair lending practices have harmed tens of thousands of borrowers who’ve been placed in unaffordable loans and, as a result, our communities are now being destabilized by a skyrocketing number of home foreclosures,” Illinois charged.

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