The state of California has reached a settlement in a predatory lending lawsuit against former executives at Countrywide Financial Corp. that will pour $6.5 million into a fund to help foreclosed homeowners.
The state had sued Countrywide, CEO Angelo Mozilo and President David Sambol under former Attorney General Jerry Brown. The 2008 lawsuit alleged that the company lured borrowers with low "teaser" rates on adjustable rate loans. Loan officers didn't tell borrowers that the rates would jump, that prepayments would be penalized, and the total loan costs would skyrocket, even if they made additional payments, the state alleged.
The settlement filed Wednesday in Los Angeles Superior Court says Countrywide agreed to pay $6.5 million to a Foreclosure Crisis Relief Fund. It will provide restitution, mortgage modifications and relocation assistance for foreclosed homeowners, plus money for state and local agencies to prosecute mortgage fraud, Attorney General Kamala Harris said.
The lawsuit claimed that Countrywide engaged in unfair business practices and false advertising laws with just about every action it took to market and originate some of the most popular — and potentially risky — types of home loans.
Countrywide allegedly loosened its mortgage standards and verification procedures and agents overrode warnings from a computerized underwriting system that analyzed the ability of applicants to repay.
The company paid higher commissions to agents who put borrowers into loans with higher rates and fees than they qualified for based on their credit scores.
In one case described in the lawsuit, the company provided a mortgage for an 85-year-old disabled veteran with such a low credit score and high debt that he defaulted on an adjustable rate mortgage in less than six months.
The state claimed that these practices led to tens of thousands of homeowners with Countrywide loans defaulting and losing their homes to foreclosure. The attorney general's lawsuit alleged that Mozilo and Sambol knew of these practices and allowed them to continue.
The state settled with Countrywide in October 2008, with the company agreeing to provide loan modificationsand other foreclosure relief worth $8.68 billion nationwide, with $3.5 billion for California borrowers.
The executives left the company when Bank of America Corp. bought it in July 2008.
Bank of America assumed responsibility for loan modifications for Countrywide borrowers and for paying restitution to those who qualify under the terms of the settlement.