Countrywide Financial Corp. is accused of using misleading advertising and other unfair business practices to trick borrowers into taking on risky home loans they didn’t fully understand, according to a lawsuit filed yesterday by the California attorney general’s office.
The lawsuit—filed on the same day Countrywide shareholders were scheduled to vote on the company’s takeover by Bank of America Corp.—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.
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 become delinquent or gone into default in the past year.
The lawsuit alleges Countrywide obscured the potential risks in the loans, misled consumers about payment terms, prepayment penalties and other obligations, and told borrowers 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 has been under scrutiny by federal and state authorities. It faces numerous other lawsuits related to its lending practices.
The Calabasas, Calif.-based 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 earlier this month.
Assuming shareholders give their approval, Charlotte, N.C.-based Bank of America has said it could close the deal as early as July 1.
