Countrywide Home Loans Controversies

Employee and contract labor issues

A class-action lawsuit was filed against Countrywide in 2003, alleging overtime violations. Employees at Countrywide were accused of working 10–15 hours a day, six to seven days a week, without being compensated for overtime pay. The lawsuit was settled in May 2005, with $400 account executives receiving $30 million in compensation. Countrywide is also one of the companies that undertake extensive background checks on potential employment candidates. A company can view the applicant’s credit and public record papers such as litigation and divorce records, in addition to the usual employment, education, and criminal history inquiries. Applicants who refuse to permit a search are not considered by Countrywide, despite the fact that they must be permitted by the application. This policy has resulted in complaints and dispute filings from otherwise eligible applicants, alleging that the policy is discriminatory, invasive, and breaches the applicant’s privacy.

Countrywide has a policy of not providing independent brokers with the legally needed Internal Revenue Service Form 1099. However, the validity of this is debatable.

Minority and subprime borrowers

Countrywide reached an agreement with New York Attorney General Eliot Spitzer to reimburse black and Hispanic customers who were unfairly directed to higher-cost loans by Countrywide salespeople. The corporation is also committed to strengthening loan officer training and monitoring, as well as pay New York state $200,000 to cover inquiry costs.

Subprime records from around the country demonstrate a policy of lending to families with as low as $1000 in discretionary income, putting their ability to pay their bills at risk.

The Fannie Mae Foundation singled out Countrywide Financial as a “paragon” of a nondiscriminatory lender that works with community organizers and uses “the most flexible underwriting standards permitted,” according to economist Stan Liebowitz. “Lenders have had to push the rules a bit,” Countrywide’s CEO is claimed to have boasted in order to approve minority applicants. By early 2003, Countrywide’s commitment to low-income loans had increased to $600 billion.

Hurricanes Katrina, Gustav, and Rita complaints

Following the disastrous hurricanes Katrina, Gustav, and Rita, several customers have complained that Countrywide assured loan clients in the impacted areas that they may skip payments without incurring late fees, and that the payments would be added back to the end of the loan. They now claim that Countrywide pushed the loan clients to pay the missed payments in full within 30 days, along with late fees they were told they didn’t have to pay, or risk foreclosure.

Lawsuits

On June 25, 2008, Illinois Attorney General Lisa Madigan filed a civil case against Countrywide Financial Corporation in Cook County Circuit Court. The complaint is based on material collected through a subpoena in the fall of 2007. The “mortgage lender engaged in “unfair and deceptive” methods, according to Madigan’s office, to induce homeowners to apply for hazardous mortgages much beyond their means.

On June 25, 2008, California Attorney General Jerry Brown followed suit, accusing the lender of violating the state’s laws against misleading advertising and unfair business practices. The lawsuit also claims that the defendant misled many consumers by misinforming them about the workings of certain mortgages, such as adjustable-rate mortgages, interest-only loans, low-documentation loans, and home equity loans while claiming that borrowers would be able to refinance before their loans’ interest rates changed.

Connecticut Attorney General Richard Blumenthal filed a lawsuit against Countrywide in August 2008, alleging that the company had defrauded Connecticut homeowners through fraudulent lending practices.

After Bank of America acquired Countrywide in October 2008, the lawsuit was settled. The agreement calls for the modification of up to $8.4 billion in faulty “predatory loans.” Arizona, California, Connecticut, Florida, Iowa, Michigan, North Carolina, Ohio, Texas, and Washington are the states currently engaging in the settlement. Other states may decide to join the pact.

A shareholder class action lawsuit has also been filed against Countrywide for investors in asset-backed securities.

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Secondary market disruption

When Countrywide finances home loans, they typically package them for sale as mortgage-backed securities to major investors. Fannie Mae and Freddie Mac can only buy loans that meet government-sponsored enterprise requirements. Non-conforming mortgage securities must be sold to alternative investors in the private secondary market. This secondary market virtually stopped trading most non-conforming assets on August 3, 2007. There have been past secondary mortgage market interruptions, but this one appeared to be more significant, with a bigger scope and likely persistence. At ratings below AAA, Alt-A mortgages (loans granted to seemingly creditworthy customers without much or any paperwork) came to a total halt. Much of the AAA-rated mortgage-backed securities were affected. Securities with conforming mortgages were the only ones on the market. Countrywide Financial said in a statement that its mortgage division had a financial cushion of approximately $50 billion.

Following the failure of American Home Mortgage on August 6, 2007, the focus shifted to Countrywide Financial, which had issued around 17% of all mortgages in the United States at the time. Only a few days later, Countrywide Financial told the Securities and Exchange Commission (SEC) that the secondary mortgage market interruptions might cost it money:

Because the company relies heavily on credit to fund its operations, disruptions in the debt markets or a downgrade in our credit ratings could have a negative impact on our earnings and financial health, especially in the short term… For some market participants, current debt market conditions include less liquidity and higher credit risk premiums. These conditions, which raise the cost of borrowing and restrict the amount of debt available, may persist or deteriorate in the future…. However, there is no guarantee that the Company will succeed in these efforts, that such facilities would be enough, or that the cost of debt would allow us to operate profitably.

This fueled concerns that Countrywide was on the verge of going bankrupt. A run on the bank occurred on August 10 when the secondary mortgage market collapsed, limiting fresh mortgage funding.

Countrywide bonds’ perceived risk increased. Countrywide’s credit rating agencies, Fitch, Moody’s, and Standard & Poor’s, all downgraded the company by one or two grades, with several downgrading to near-junk status. Overnight, the cost of insuring its bonds increased by 22%. It also had restricted access to commercial paper as a result of this. The countrywide paper was attempted to be sold by several institutional investors. Fifty other mortgage lenders had previously filed for Chapter 11 bankruptcy, and Merrill Lynch and others had identified Countrywide Financial as a possible bankruptcy risk on August 15. This, combined with reports that the company’s capacity to issue fresh commercial paper may be significantly restricted, put the stock under a lot of pressure. Its stock dropped $3.17 to $21.29, the most in a single day since the 1987 meltdown when it had already lost 50% of its value that year. Merrill Lynch advised its customers to sell their Countrywide stock on August 15, 2007.

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