The suit, filed Wednesday by the top federal prosecutor in Manhattan, also underscored how Bank of America's purchase of Countrywide in July 2008, just before the financial crisis, backfired severely.
The prosecutor, Preet Bharara, said he was seeking more than $1 billion, but the suit could ultimately recover much more in damages.
"This lawsuit should send another clear message that reckless lending practices will not be tolerated," Bharara said in a statement. He described Countrywide's practices as "spectacularly brazen in scope."
Bank of America had no immediate comment.
Countrywide was a giant in mortgage lending, but was also known for approving exotic, even risky, loans. By 2007, as the market for subprime mortgages collapsed, Countrywide was anxious for revenue.
The lawsuit alleged that the company loosened its standards for making loans while telling Fannie Mae and Freddie Mac, which were buying loans from Countrywide, that standards were getting tighter.
Fannie and Freddie, which packaged loans into securities and sold them to investors, were effectively nationalized in 2008 when they nearly collapsed under the weight of their mortgage losses.
To churn out more mortgage loans, Bharara said, Countrywide introduced a program called the "Hustle," shorthand for "High-Speed Swim Lane." It operated under the motto, "Loans Move Forward, Never Backward."
The program eliminated checks meant to ensure that mortgages were being made to borrowers who could afford them, according to the lawsuit.
For example, loan processors no longer had to complete worksheets that helped them assess whether income levels that borrowers entered on their loan applications were reasonable.
If processors entered a borrower's information into a computerized underwriting program and the program raised flags, employees were encouraged to change the numbers, the suit said.
It also said that bonuses were awarded based solely on the number of loans that an employee could generate, not on their quality.
The process led to "widespread falsification" of mortgage data, Bharara charged. And Countrywide executives hid the problem, according to the lawsuit.
In early 2008, for example, Countrywide offered bonuses for employees who could "rebut" the high rate of defaults. The standards were low, according to the lawsuit: If a review found that the income a borrower listed on his application seemed unreasonable, an employee could rebut the finding "simply by arguing that the stated income was reasonable."
The lawsuit gives seven examples of mortgages made for homes in California, Alabama, Florida and Georgia in which the borrowers' income and other qualifications were falsified.
For example, one loan application, for a home in Miami, said that the borrower was an airline sales representative earning $15,500 per month, when the borrower worked for a temp agency and earned $2,666 per month. The borrower defaulted within seven months, the suit said.
A loan application for a home in Birmingham, Ala., failed to disclose $81,000 in debt that the borrower was carrying. That borrower defaulted within a year, the suit said.
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