A recent district court decision could substantially expand the scope of liability under the Financial Institutional Reform Recovery and Enforcement Act to pursue financial fraud cases against banks.

FIRREA, enacted in response to the savings-and-loan-crisis of the 1980s, empowers federal prosecutors to seek civil penalties for a wide range of fraud crimes that specifically “affect” a federally insured financial institution. Such crimes include mail and wire fraud, bank fraud, and false statements made to the government.

Despite its expansive reach, regulators used the statute infrequently as an enforcement mechanism—that is, until the wake of the financial crisis, when the acquittals of several high-profile criminal defendants forced the government to rethink its efforts.  

In the latest ruling, U.S. District Judge Jed Rakoff on Aug. 19 took an even broader interpretation of FIRREA.

The case, U.S. v. Bank of America, stems from a lawsuit the Justice Department filed in October 2012 against BofA over allegations that the defendants engaged in fraud and made false representations in connection with the sale of loans by Countrywide Financial to Fannie Mae and Freddie Mac in violation of FIRREA. According to the allegations, Countrywide removed quality checkpoints in order to speed up the processing of certain home loans, resulting in the sale of thousands of fraudulent and defective mortgages to Fannie and Freddie.

In its lawsuit, the Justice Department argued that FIRREA can be asserted against a bank when the affected financial institution is the bank itself. Other banks that have faced similar FIRREA claims have objected to this theory, arguing that the government is taking an overly broad reading of the law.

In BofA's case, however, Rakoff agreed with the Justice Department: “Although the parties spend endless pages discussing each of these theories in terms of legislative history, policy considerations, and the like, in the court's view, validation of the first theory—that it is enough that the fraud affected BofA—requires nothing more than straightforward application of the plain words of the statute,” Rakoff wrote.

The word “affect” is a “simple English word,” Rakoff wrote, citing the Webster's Dictionary in his opinion. “The fraud here in question had a huge effect on BofA itself (not to mention its shareholders).”

Some legal experts say Rakoff's ruling means the Justice Department can now pursue FIRREA claims not just against bank fraud, but also against the banks themselves for defrauding others. The rulings could also encourage the government to target a wider range of financial services firms, legal experts say.

In the last few months, FIRREA increasingly has played a central role in several civil fraud lawsuits. Other banks that are currently facing civil fraud actions that accuse the banks of violating FIRREA include Wells Fargo, Bank of New York Mellon, and Allied Home Mortgage.