2 States Sue Countrywide
Thursday, June 26, 2008
Countrywide Financial was accused of using misleading advertising and other unfair business practices to trick borrowers into taking on risky home loans they didn't fully understand in a lawsuit filed yesterday by the California attorney general's office.
The lawsuit -- filed on the same day Countrywide shareholders approved the company's takeover by Bank of America -- stems from information gathered under subpoena after the state launched a probe last year into the troubled company's business.
It also came on the same day the Illinois attorney general filed a lawsuit alleging Countrywide engaged in "unfair and deceptive" practices to get homeowners to apply for risky mortgages far beyond their means.
In the complaint filed in state Superior Court, California Attorney General Jerry Brown asserts that Countrywide violated the state's unfair business practices and false advertising laws with just about every action it took to market and originated some of the most popular -- and potentially risky -- types of home loans in recent years.
"Defendants viewed borrowers as nothing more than the means for producing more loans, originating loans with little or no regard to borrowers' long-term ability to afford them and to sustain homeownership," the state claims in the suit, which also names as defendants Countrywide chief executive Angelo Mozilo and David Sambol, the lender's president.
Representatives for Countrywide and Bank of America did not immediately return calls seeking comment.
The state claims the company misled customers about the workings of home equity loans and some types of adjustable-rate mortgages, including pay-option loans, "hybrid" interest-only loans and low-documentation loans.
These loan types, which many other lenders offered during the housing boom, featured low initial payments and the potential for sharp increases after a few years. They now account for a large portion of the mortgages that have defaulted or become delinquent in the past year.
The lawsuit alleges Countrywide obscured the potential risks in the loans, misled borrowers about payment terms, prepayment penalties and other obligations, and told them they would be able to refinance before the interest rate on their loans adjusted.
"Defendants knew, or by the exercise of reasonable care should have known, that these statements were untrue or misleading at the time they were made," the lawsuit states.
As the nation's largest mortgage lender and servicer, Countrywide, of Calabasas, Calif., has been under scrutiny by federal and state authorities. It also faces numerous lawsuits related to its lending practices.
The lender agreed in January to sell itself to Bank of America for about $4 billion in stock. The acquisition, now valued at around $2.8 billion, received clearance from the Federal Reserve this month.
At the shareholder meeting yesterday, a majority of outstanding shares voted to approve the takeover. The deal is expected to close July 1.