Bank Of America: There Should Be 'Zero' Penalty For 'Hustle' Scheme

* U.S. sought $863.6 million in mortgage fraud case

* Countrywide process said to hurt Fannie Mae, Freddie Mac

* In Wednesday filing, bank calls U.S. argument "offensive"

By Jonathan Stempel

NEW YORK, Nov 21 (Reuters) - Bank of America Corp urged a U.S. federal judge to impose no penalty even after a jury found it liable for fraud over the sale of defective mortgages by its Countrywide Financial unit.

The U.S. Department of Justice is seeking $863.6 million of damages from the second-largest U.S. bank over losses that government-controlled mortgage companies Fannie Mae and Freddie Mac incurred after buying the home loans in 2007 and 2008.

But in a court filing on Wednesday night, four weeks after the jury verdict in the civil case, Bank of America told U.S. District Judge Jed Rakoff in Manhattan that under applicable law it should pay at most $1.1 million.

Investigators said a Countrywide process known as "Hustle," as well as "High Speed Swim Lane" and "HSSL," had rewarded employees for the quantity of loans produced and eliminated checkpoints meant to ensure that the mortgages were sound.

But Bank of America said the government could not show that Fannie Mae's and Freddie Mac's losses stemmed from alleged Countrywide misrepresentations "as opposed to other factors such as the worldwide mortgage crisis."

Bank of America, which bought Countrywide in July 2008, also took the government to task for seeming trying to punish it for defending itself at trial.

In its Nov. 8 request for penalties, the government said Bank of America "frequently defied both the evidence and common sense" at trial by insisting there was no proof of fraud.

"The government's argument is offensive, suggesting a defendant should be more severely punished when it dares to defend itself against allegations of fraud which it truly believed were baseless - and still does," Bank of America said. "The penalties in this matter should be zero."

The office of U.S. Attorney Preet Bharara in Manhattan did not immediately respond on Thursday to a request for comment.

Former midlevel Countrywide executive Rebecca Mairone was also found liable for fraud at the same trial.

In another Wednesday court filing, lawyers for the single mother, who later joined JPMorgan Chase & Co, called the U.S. request that she be fined "excessive" and unnecessary.

"Ms. Mairone has already been severely punished, personally and professionally," her lawyers said. "Unjustly depicted in the media as the villainous face of the mortgage crisis and in professional limbo, Ms. Mairone is facing ruin, even as the full consequences of the verdict are not yet realized."

JPMorgan was not immediately available for comment.

OTHER LAWSUITS

It is unclear when Rakoff will rule.

In September 2009, he rejected a $33 million settlement of U.S. Securities and Exchange Commission charges that Bank of America misled investors about its takeover of Merrill Lynch & Co, an accord that included no admission of wrongdoing.

He approved a revised $150 million settlement five months later, while lamenting it as "half-baked justice at best."

Bank of America also faces other mortgage lawsuits. These include a Justice Department case in Charlotte, North Carolina, where the bank is based, and a multibillion dollar lawsuit by insurer American International Group Inc.

Meanwhile, a New York state judge this week heard closing arguments on whether the bank may complete an $8.5 billion settlement with investors who bought mortgage securities.

The Hustle 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.