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  • International bank settles with DOJ for $765 million regarding alleged RMBS misconduct

    Securities

    On October 9, the U.S. Attorney for the District of Colorado announced that an international bank would settle claims related to the bank’s packaging, securitizing, issuing, marketing and sale of residential mortgage-backed securities (RMBS) in the lead-up to the 2008 financial crisis. In particular, the U.S. alleged that (i) the bank’s due diligence loan review procedures disclosed to investors were not, in certain instances, followed; (ii) bank managers overruled due diligence vendors’ warnings regarding the quality of certain loans included in securitizations; and (iii) the bank misrepresented the quality of the RMBS to investors. The bank disputes the allegations and does not admit to any liability or wrongdoing, but agreed to pay a $765 million civil money penalty pursuant to the Financial Institutions Reform, Recovery, and Enforcement Act to resolve the matter.

    Securities DOJ Settlement RMBS FIRREA

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  • Lehman seeks to add indemnity claims against mortgage sellers

    Courts

    On October 1, Lehman Brothers Holdings Inc., the firm’s plan administrator, and certain subsidiaries moved to increase the indemnification claims brought against mortgage sellers, seeking to include obligations resulting from more than $2.45 billion in residential mortgage-backed securities (RMBS) trust claims. Lehman’s prior claims addressed indemnification claims held against roughly 3,000 counterparties involving more than 11,000 mortgage loans related to litigation settlements reached with Fannie Mae and Freddie Mac. Lehman now seeks to increase the indemnification claims to include claims from additional settlements reached earlier this year for an additional $2.45 billion in RMBS allowed claims. The proposed amended order does not seek to materially change existing procedures, but only seeks to add claims which had not accrued when the original order was entered pursuant to Federal Rule of Bankruptcy Procedure 9024. Lehman asserts the amendment is appropriate under Bankruptcy Rule 7015 and would benefit the creditors by “expediting the resolution and recovery on account of such claims and by increasing distributions to creditors.”

    Courts Bankruptcy Indemnity Claims Fannie Mae Freddie Mac Mortgages RMBS

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  • International bank agrees to pay $4.9 billion in civil penalties to settle allegations of RMBS misconduct

    Securities

    On August 14, the DOJ announced a settlement with an international bank to resolve federal civil claims of misconduct in the bank’s underwriting and issuing of residential mortgage-backed securities (RMBS) to investors in the lead-up to the 2008 financial crisis. According to the press release, the bank allegedly violated the Financial Institutions Reform, Recovery, and Enforcement Act by, among other things, failing to accurately disclose the risk of the RMBS investments when selling the securities. Under the terms of the settlement, the bank has agreed to pay a civil penalty of $4.9 billion. The bank disputes the allegations and does not admit to any liability or wrongdoing.

    Securities DOJ Settlement RMBS Mortgages International FIRREA

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  • 2nd Circuit holds NCUA lacks standing to bring derivative suit against two national banks regarding RMBS claims

    Courts

    On August 2, the U.S. Court of Appeals for the 2nd Circuit held that the National Credit Union Administration (NCUA) lacked standing to bring a suit against two national banks on behalf of trusts created by the agency that held residential mortgage-backed securities (RMBS). According to the opinion, in 2009 and 2010, NCUA took control of five failing credit unions, including ownership of certificates the credit unions held in RMBS trusts. NCUA then transferred the certificates into new trusts and a financial institution was appointed, pursuant to an Indenture Agreement, as Indenture Trustee. NCUA subsequently brought derivative claims on behalf of the trusts against two national banks, trustees of the original RMBS trusts. In affirming the lower court’s dismissal of the claims, the appellate panel found that the NCUA did not have derivative standing to sue on behalf of the trusts because the trusts had granted the right, title, and interest to their assets, including the RMBS trusts, to the Indenture Trustee. The 2nd Circuit reasoned that therefore only the Indenture Trustee possesses the claims, and the NCUA did not have the right to sue on behalf of the Indenture Trustee under the Indenture Agreement.

    Courts Second Circuit Appellate RMBS Standing Securities

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  • National bank settles with DOJ for $2.09 billion over RMBS misrepresentations

    Federal Issues

    On August 1, the Department of Justice (DOJ) announced a settlement with a national bank and several of its affiliates (bank) for allegedly misrepresenting the quality of certain loans originated by the bank that were packaged and sold in residential mortgage-backed securities (RMBS). The alleged representations related to debt-to-income ratios for stated income loans sold to investors and in which a significant number of borrowers misstated income information on the applications. The settlement agreement states that the bank “sold at least 73,529 stated income loans in RMBS during [2005-2007], and nearly half of those loans defaulted.” The bank, without admitting liability or wrongdoing, agreed to pay $2.09 billion in a civil money penalty under the Financial Institutions Reform, Recovery, and Enforcement Act, and the DOJ agreed to release the bank from any civil claims arising under several other laws, including: (i) the False Claims Act; (ii) the Program Fraud Civil Remedies Act; (iii) the Racketeer Influenced and Corrupt Organizations Act; and (iv) the Injunctions Against Fraud Act.

    Federal Issues DOJ RMBS Settlement Loan Origination Mortgages

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  • International bank must maintain $500 million bond securing $806 million RMBS judgment

    Courts

    On July 5, the U.S. District Court for the Southern District of New York issued a memorandum opinion and order stating that an international bank must maintain the $500 million bond it had filed in 2015 to secure $806 million in damages owed to the Federal Housing Finance Agency for selling allegedly faulty residential mortgage-backed securities to Fannie Mae and Freddie Mac. The court had stayed execution of the judgment pending appeal, and the stay expired on July 5, following the Supreme Court’s denial without comment of the bank’s petition for writ of certiorari. (See previous InfoBytes coverage here.) According to the district court opinion and order, the bank maintained that the stay order required the bond to remain in effect only through July 5, even though the bank was not required to pay the final judgment until July 20. The court disagreed, explaining that a “more natural reading of the [s]tay [o]rder and the [b]ond together is that the [b]ond must remain in place until two conditions are met: (1) the stay of execution ends and (2) the [f]inal [j]udgment is satisfied. Condition 1 has now been met, but not condition 2.” The court added that the bank is free to satisfy the final judgment prior to its July 20 due date, at which point the bond could be dissolved prematurely.

    Courts FHFA RMBS Bond U.S. Supreme Court Fannie Mae Freddie Mac

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  • International bank settles with Illinois Attorney General for $20 million for alleged RMBS misconduct

    State Issues

    On July 3, the Illinois Attorney General announced a settlement with an international bank to resolve allegations of misconduct in the bank’s marketing and sale of residential mortgage-backed securities (RMBS) in the lead-up to the 2008 financial crisis. According to the press release, the bank allegedly failed to disclose accurately the risk of the RMBS investments when selling the securities. Under the terms of the settlement, the bank has agreed to pay $20 million to the state, which will be divided between three state retirement systems. This settlement follows several other RMBS-related actions taken by the Attorney General.

    As previously covered in InfoBytes, earlier in March, the bank reached a settlement with the New York Attorney General to resolve similar allegations.

    State Issues State Attorney General Settlement RMBS Mortgages

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  • Supreme Court rejects review of $806 million RMBS judgment

    Courts

    On June 25, the Supreme Court denied without comment an international bank’s petition for writ of certiorari to challenge the $806 million in damages awarded by the Federal Housing Finance Agency (FHFA) for selling allegedly faulty mortgage-backed securities to Fannie Mae and Freddie Mac. As previously covered by InfoBytes, in September 2017, the U.S. Court of Appeals for the 2nd Circuit affirmed the New York District Court’s ruling requiring the $806 million payment. Both lower courts concluded that the marketing prospectus used to sell the mortgage securities to Fannie and Freddie between 2005 and 2007 contained “untrue statements of material fact,” including false statements regarding the underlying loans’ compliance with underwriting standards related to the creditworthiness of borrowers and appraisal value of the properties.  

    Courts U.S. Supreme Court Writ of Certiorari RMBS FHFA Appellate Second Circuit Fannie Mae Freddie Mac

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  • New York Court of Appeals rules claims under Martin Act governed by three-year statute of limitations

    Courts

    On June 12, the New York Court of Appeals issued a 4 to 1 ruling that claims brought under the state’s Martin Act are governed by a statute of limitations of three years, not six. Former New York Attorney General Eric Schneiderman filed a suit against a bank alleging that in 2006 and 2007, the bank misrepresented the quality of residential mortgage-backed securities it created and sold, bringing its claims under the state’s Martin Act, which grants the Attorney General of New York expanded liability for investigating and enjoining fraudulent practices in the marketing of stocks, bonds and other securities beyond what can be recognized under the common law fraud statute. The bank argued that the action was time-barred because too much time had elapsed to bring claims under the Martin Act, and an argument ensued as to whether the three-year statute of limitations that applies to actions to recover upon a liability or penalty imposed by a statute, or the six-year statute of limitations that applies to an action based upon fraud, applied. In its decision, the majority wrote that the three-year period applied because the Martin Act “expands upon, rather than codifies, the common law of fraud” and “imposes numerous obligations—or ‘liabilities’—that did not exist at common law, justifying the imposition of a three-year statute of limitations.” The court concluded that the broad definition of “fraudulent practices” encompasses wrongs that are not otherwise cognizable under the common law and “dispenses, among other things, with any requirement that the Attorney General prove scienter or justifiable reliance on the part of investors.” The court remanded the case to the New York State Supreme Court for further proceedings concerning the state’s claim against the bank for alleged violations of Executive Law Section 63(12).

    Courts Mortgages RMBS State Issues State Attorney General

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  • SEC settles RMBS supervision and improper markup allegations with brokerage firm

    Securities

    On June 12, the SEC issued an order against a brokerage firm to settle allegations that it violated antifraud provisions of federal securities laws when it failed to properly supervise traders who persuaded customers with false or misleading statements to overpay for residential mortgage-backed securities (RMBS). According to the SEC, the firm misled customers about how much the firm paid for the securities and illegally profited from the improper markups that were, in some cases, allegedly more than twice as much as what the customers should have paid. The order claims that the firm did not charge a traditional commission on the transactions, but rather derived profits “from the difference between the price at which [the firm] sold securities and the price at which it had purchased them.” Additionally, while the firm had policies and procedures to monitor and prevent excessive markups on RMBS transactions, they were “not reasonably designed and implemented.” While neither admitting nor denying the SEC’s charges, the firm agreed to be censured for failing reasonably to supervise its traders, to pay a fine of approximately $5.2 million, and to pay more than $10.5 million in disgorgement and interest to affected customers.

    Securities SEC RMBS Settlement Enforcement

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