This is one of the important legal questions that could be answered in the False Claims Act qui tam lawsuit against the Bank of America and Countrywide joined by the United States last month. On October 24, 2012, Manhattan U.S. Attorney Preet Bharara announced that his office had filed a Complaint, joining the FCA lawsuit filed by whistleblower Edward J. O'Donnell, a former executive vice president of Countrywide. The government's complaint also adds claims under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA). The United States' Complaint alleges that over $1 billion in losses were suffered by government sponsored enterprises (GSEs) Fannie Mae and Freddie Mac for defaulted loans fraudulently sold by Countrywide and Bank of America from 2007-2009. It seeks civil penalties under FIRREA, as well as treble damages and penalties under the False Claims Act. Id. [See complaint.]
Defendant Bank of America, who acquired Countrywide in July 2008, is expected to move to dismiss the FCA case, arguing that Fannie Mae and Freddie Mac were not agents of the federal government within the meaning of the FCA for at least part of the time at issue. [See CNBC and NY Times articles.] There are many wrinkles to this argument, but in its simplest form, here it is: up until May 20, 2009 when the FCA was amended by the Fraud Enforcement and Recovery Act of 2009 (FERA), to be actionable, a false claim had to be made to an officer or employee of the United States Government, and the term "claim" meant a request or demand for money or property that is presented to an officer, employee, or agent of the United States or is made to a contractor, grantee, or other recipient [of federal money]. See 31 U.S.C. section 3729(a)(1) and (c). Fannie and Freddie were GSEs, and BOA will argue, outside the FCA definitions. [See NY Times announcement of case].
BOA's argument becomes even more complicated and nuanced for conduct after Fannie and Freddie were placed in federal conservatorship under the auspices of the Federal Housing Finance Agency in September 2008; between then and December 2011, the federal taxpayers have been stuck with a tab of over $183 billion for Fannie and Freddie's losses. In addition, the FERA amendments in May 2009, some of which Congress made retroactive to June 2006 (which may be challenged in court), eliminated the requirement that the claim be presented to an officer or employee of the Government, and expanded the definition of "claim". Indeed, part of Congress' intent in FERA was to anticipate and address liability for the unfolding mortgage, housing and financial crises.
Needless to say, this is an important case to watch as Fannie Mae and Freddie Mac have suffered hundreds of billions of dollars in losses on defaulted loans sold to them not just by Bank of America, but by many other lenders.