BofA appeals $1.3bn 'Hustle' toxic loan penalty

Bank of America has appealed against a $1.3bn penalty for selling toxic home loans, arguing that the court prevented it from putting up a robust defence to charges that it knowingly sold bad mortgages in the run-up to the financial crisis.

In an appeal filed in the Second US Circuit Court of Appeals on Wednesday, the second-biggest US bank by assets said that it had not been allowed to present key evidence that the loans in question, made by a unit of Countrywide, the California-based mortgage originator that BofA bought in 2008, were "at least as high quality as other loans".

The bank also complained that the court had excluded "relevant" testimony from witnesses who believed that the loan programme in question - known as the "Hustle" - was "proper and produced good-quality loans".

BofA also queried the use of a 1998 Act to bring the suit, noting that the law in question - the Financial Institutions Reform, Recovery and Enforcement Act - had been drawn up in the wake of the 1980s savings-and-loan crisis to shield federally-insured banks from misconduct by others. It also noted that provision normally caps penalties at $1.1m.

"From beginning to end, what took place in this case was not only unfair, but utterly unprecedented," the bank wrote. "This case never should have gone to trial."

The Department of Justice sued Bank of America in October 2012, alleging the bank committed civil fraud by selling defective home loans to US government-backed mortgage companies.

The lawsuit said that Countrywide implemented a process to deal with loans at high speed without checking their quality.

Thousands of toxic loans were then sold to Fannie Mae and Freddie Mac, the government-backed mortgage companies, and later defaulted, the DoJ's lawsuit claimed.

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Last July, BofA was ordered to pay $1.3bn by Judge Jed Rakoff, who described the process as a "brazen fraud". His assessment of the penalty was below the government's request of $2.1bn, but well in excess of what the bank hoped to pay.

The court heard that Countrywide set up a scheme in August 2007 called the "high speed swim lane", "HSSL" or "Hustle", which fast-tracked mortgages for sale without proper checks on the borrower's ability to repay the loan.

Judge Rakoff said: "[W]hile the HSSL process lasted only nine months, it was from start to finish the vehicle for a brazen fraud by the defendants, driven by a hunger for profits and oblivious to the harms thereby visited, not just on the immediate victims but also on the financial system as a whole."

The case was unusual in that BofA chose to fight it at trial rather than settle.

The Financial Institutions Reform, Recovery and Enforcement Act empowers the US to bring civil charges against any actor that has committed certain crimes "affecting a federally insured financial institution". The law is a powerful tool for the government because it has a 10-year statute of limitations and potential for significant penalties.

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