By JENNIFER B. MCKIM
A whistle-blower complaint before the Department of Labor reveals widespread mortgage fraud in the Massachusetts offices of Countrywide Financial Corp. in the years leading up to the housing bust and subsequent financial crisis.
The fraud, which included forging documents and altering paperwork to manipulate borrowers’ financial information, was so rampant that Countrywide, once the nation’s largest mortgage lender, shut down six of its eight Massachusetts offices and fired 44 employees after the practices were uncovered in 2007, according to documents in the case. The victims were largely uninformed home buyers and owners who were saddled with mortgages they could not afford.
“By 2006, Countrywide’s business had degenerated into a massive fraudulent enterprise designed to generate commissions on new loans in high volumes without meaningful consideration of a homeowner’s ability to pay,’’ said Gary Klein, a Boston lawyer with Klein Kavanagh Costello LLP, a firm that represents homeowners fighting foreclosures. “Tens of thousands of Massachusetts families were sucked into expensive refinancing deals with significant hidden fees and costs.’’
The illegal practices in Massachusetts are at the crux of a whistle-blower complaint brought by Eileen Foster, a former executive vice president at Countrywide who investigated fraud at the company. Foster alleges that after she uncovered problems in Massachusetts, she expanded her inquiry to include fraudulent practices in other offices, and a subsequent coverup involving top management – and was fired in 2008 as a result.
Foster declined to comment for this article, but said in a December interview on “60 Minutes,’’ the CBS television news program, that fraud at Countrywide was systemic.
“It wasn’t just one individual or two or three individuals, it was branches of individuals, it was regions of individuals,’’ she said. “All of the, the recycle bins, whenever we looked through those, they were full of, you know, signatures that had been cut off of one document and put onto another and then photocopied, you know, or faxed.’’
Foster’s case is now before an administrative judge in the Labor Department, which has jurisdiction over whistle-blower cases under the federal law known as Sarbanes-Oxley. That law, passed following the Enron scandal of a decade ago, included provisions that protect employees of public companies from retaliation for reporting fraud.
Bank of America, which took over Countrywide in 2008, is appealing a Labor Department ruling that found “reasonable cause’’ that Foster’s firing was in retaliation for her exposure of fraud. The ruling, issued in September, ordered Bank of America to pay her about $930,000 in back wages, fees, and damages.
“It’s clear from our investigation that Bank of America used illegal retaliatory tactics against this employee,’’ said David Michaels, assistant secretary for the federal Occupational Safety and Health Administration. “This employee showed great courage reporting potential fraud and standing up for the rights of other employees to do the same.’’
Bank of America officials, however, said the company would not fire an employee for bringing up wrongdoing. The bank says Foster was dismissed for her “management style and treatment of others.’’ A hearing before an administrative judge is scheduled for April 30.
“The company has channels for employees to raise concerns about issues they see, and we take those concerns very seriously and investigate them thoroughly,’’ said bank spokesman Richard Simon.
Countrywide is considered a major culprit in the practices that sparked the subprime mortgage crisis and cascaded into a global financial crisis and economic downturn. Since then, Bank of America has agreed to pay billions of dollars to settle cases of predatory lending and mortgage fraud by Countrywide.
Most recently, Bank of America agreed to pay $335 million in compensation to Countrywide victims of discriminatory lending in a deal with the Department of Justice. In 2010, Massachusetts Attorney General Martha Coakley settled predatory lending charges against Countrywide – leading to $3 billion to help troubled homeowners around the country – after finding that some 70 percent of the company’s Massachusetts subprime loans had gone into default, evidence that mortgage practices were seriously flawed.
Richard E. Condit, senior counsel with the Government Accountability Project, a Washington-based nonprofit representing Foster, said his client’s story puts a spotlight on a mortgage industry that cared more about short-term gains than long-term stability. “There is little indication the culture that created this crisis will ever change,’’ he said.