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Bank of America faces at trial ex-executive behind whistleblower case

Customers use ATMs at a Bank of America banking center in New York's financial district January 17, 2013. REUTERS/Brendan McDermid
Customers use ATMs at a Bank of America banking center in New York's financial district January 17, 2013. REUTERS/Brendan McDermid

By Nate Raymond

NEW YORK (Reuters) - A former executive at Bank of America Corp's Countrywide unit testified Thursday that the mortgage company's problematic lending practices predated the "Hustle" process for which the bank went on trial this week.

Edward O'Donnell, a former executive vice president at a Countrywide Financial Corp subsidiary, filed a whistleblower lawsuit last year against Bank of America, which bought Countrywide during the financial crisis.

O'Donnell's lawsuit is the basis of the U.S. Justice Department's case alleging that Countrywide defrauded mortgage underwriters Fannie Mae and Freddie Mac by selling them mortgages that later defaulted.

O'Donnell, who stands to earn an award if the government wins at trial, was testifying for the government on Thursday, the third day of the trial.

He said he worked at a Countrywide division that handled subprime mortgage loans. When Countrywide tried to move away from that business, a unit of the company making less-risky prime loans was folded into his, he said.

There were instances where loans that unit produced "did not meet our standards and had problems," he said.

"I saw these instances as problems," he said. "I wanted greater quality and better control."

Countrywide later made some changes at his urging, he said.

O'Donnell is expected to continue to testify on Friday about a subsequent Countrywide program called the "High Speed Swim Lane" - also called "HSSL" or "Hustle." The program, which began in 2007 as mortgage delinquency and default rates were on the rise, circumvented toughening standards at Fannie and Freddie, O'Donnell has said.

The "Hustle" loans caused Fannie and Freddie to suffer a gross loss of $848.2 million and a net loss of $131.2 million on loans that were materially defective, the Justice Department says.

The Justice Department's case stems from a lawsuit O'Donnell filed under seal in February 2012 under the False Claims Act. The law allows whistleblowers to bring cases on behalf of the government against companies that defraud it.

He worked at Countrywide from 2003 to 2007. In a twist, he today works at Fannie Mae as a vice president of credit risk management, a spokesman for the mortgage giant confirmed.

In his lawsuit, O'Donnell said he frequently objected to the "Hustle" program and sought to take steps that would stop the rapid deterioration in loan quality.

O'Donnell in the lawsuit said his concerns were disregarded and he was marginalized. He "became one often lone voices within the division pointing to the loan quality issues, increase of early payment defaults and growing number of early defaulted loans," his lawsuit said.

NEW CUSTOMER ACQUISITION GROUP

O'Donnell, who took the stand toward the end of Thursday, only spoke briefly about HSSL, which he will likely discuss most of Friday. But he discussed how another unit of Countrywide called the New Customer Acquisition (NCA) group had problems of its own.

In 2007, O'Donnell said the Full Spectrum Lending division he worked in was rapidly moving away from producing subprime loans, which investors were increasingly becoming unattractive to investors, to less-risky prime loans.

At part of that process, Countrywide began moving the NCA group, which had more experience putting together prime loans, into the Full Spectrum Lending division, he said.

But executives in Full Spectrum Lending had concerns about the quality of loans coming out of NCA and about loan specialists "making decisions they were not entitled to make" in approving mortgages, O'Donnell said. Among the issues he cited was the expectation loan specialists move one loan per day each to closing, he said.

In a June 2007 email displayed in court, Robert Price, a senior vice president overseeing a funding center in Richardson, Texas, told the NCA group's supervisor the "overwhelming response" of his managers was it was "not uncommon for employees feeling pressure to take short cuts and make poor decisions to hit numbers."

O'Donnell compared the NCA program to how Countrywide structured Hustle, which was a similar effort to generate prime loans and that like NCA gave loan specialists greater authority over loans while minimizing the role of underwriters in reviewing loan quality.

"It was essentially the same as NCA workflow before we made changes to it," he said.

The case is U.S. ex rel. O'Donnell v. Bank of America Corp et al, U.S. District Court, Southern District of New York, No. 12-01422.

(Reporting by Nate Raymond in New York; editing by Andrew Hay)

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