Countrywide Financial faces unethical business practices prosecution

America’s biggest sub-prime mortgage lender, Countrywide Financial, was slapped with a prosecution for unethical business practices today just hours before its shareholders were due to vote the company out of existence.

The attorney general of Illinois, Lisa Madigan, announced she was filing a civil action against Countrywide for deceitful conduct and lax standards in the way it provided sub-prime mortgages to customers.

Countrywide is accused of using misleading marketing to sell mortgages packed with hidden fees and risky terms as part of a "single-minded quest" to dominate the US homeloans industry.

"Countrywide used egregiously unfair and deceptive lending practices to steer borrowers into loans that were destined to fail," said Madigan.

The suit, which is the first action brought against Countrywide by a public prosecutor, has been brought on behalf of thousands of people in the Chicago area who are in danger of losing their homes. Some 35% of Countrywide’s sub-prime mortgages are in default.

Madigan alleges that Countrywide knowingly put people in unaffordable loans by exaggerating their income. In addition to seeking damages from Countrywide, the action targets the company’s chief executive Angelo Mozilo, who earned $132m (?65m) last year, and demands that he contribute personally to damages.

Madigan said: "Countrywide’s unfair lending practices have harmed tens of thousands of borrowers who’ve been placed in unaffordable loans and, as a result, our communities are now being destabilised by a skyrocketing number of home foreclosures."

Countrywide provided one in seven of America’s mortgages but the sub-prime crisis has driven it to the brink of bankruptcy. The company lost $704m last year and went a further $893m into the red during the first quarter of 2008.

The company’s investors gathered for a special meeting in California today to vote on a rescue buyout by Bank of America, which intends to buy Countrywide’s assets but do away with the brand name.

Since the buyout was agreed in January, the value of Bank of America’s offer has plunged from $4bn to $2.8bn as shares in both companies have slumped.

Two Democratic senators — Christopher Dodd and Kent Conrad — have faced embarrassing revelations in recent weeks about "VIP" mortgages provided to them by Countrywide. Under a "friends of Angelo" programme, they received loans on favourable terms, although both have denied asking for any special treatment.