By Joseph Ax
NEW YORK (Reuters) - U.S. prosecutors grilled a former executive of Bank of America Corp's (BAC) Countrywide unit in federal court on Wednesday, seeking to show she pressed employees to churn out thousands of substandard loans with little regard for their quality.
Rebecca Mairone, who served as chief operating officer for Countrywide's Full Spectrum Lending Division, is the only individual defendant in the government's civil case against Bank of America over defective mortgages that Countrywide allegedly sold to Fannie Mae (FNMA) and Freddie Mac (FMCC) in the months leading up to the 2008 financial crisis.
Assistant U.S. Attorney Jaimie Nawaday pointed out that Mairone had supported contests with names such as "On-Fire February" and "March Madness" for employees who funded the most loans in a given month.
Under questioning from her own attorney, Mairone said the contests were a motivational tool intended to "make it more fun."
"It was certainly not something that got in the way of controls," she said.
The trial, which started in U.S. District Court in Manhattan last month, is based on the government's claims that Countrywide defrauded the government-sponsored mortgage finance companies by creating a process called the "high-speed swim lane" (HSSL), or "Hustle," which sped up approvals for unqualified borrowers.
The case is the first brought by the government against a major financial institution over mortgage practices to reach trial since the financial crisis. It stems from a whistleblower lawsuit filed by former Countrywide executive Edward O'Donnell.
The government estimates the mortgage finance companies had a gross loss of $848.2 million on Countrywide's "Hustle" loans. The net loss on loans that were materially defective was $131.2 million, according to prosecutors.
In referring to reports that ranked employees based on the number of loans they funded and bonuses tied to loan volume, Nawaday sought to show that Mairone was more concerned with quantity than quality. Mairone said decisions were made in collaboration with other executives.
At one point, Nawaday showed Mairone an email from another executive to various managers, including Mairone, saying the company would have to change the culture, "that was highly focused on turn time and lock-to-fund ratio."
"That's a culture you created, correct?" Nawaday said.
"No, that's not correct," Mairone said.
When her lawyer, Marc Mukasey, asked Mairone how she balanced sales with quality, she said that quality was always a foremost concern, even as the company pushed for higher volume.
"You cannot fund a loan without quality," she said. "It's not good for the customer, it's not good for the company and it's not good for the investors."
Mairone, 46, is a managing director at JPMorgan Chase & Co (JPM).
Also on Wednesday, Bank of America reported a higher-than-expected quarterly profit, although it said mortgage production dropped sharply as higher interest rates made refinancing less attractive.
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.
(The story corrects sixth paragraph say "borrowers" from "lenders.")
(Reporting by Joseph Ax. Editing by Andre Grenon)