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  • International Bank Settles RMBS Claims with FHFA for $5.5 Billion

    Securities

    On July 12, the Federal Housing Finance Agency (FHFA), as conservator of Fannie Mae and Freddie Mac (GSEs), announced a $5.5 billion settlement with an international bank. The settlement resolves FHFA’s claims, lodged in a federal lawsuit in the District of Connecticut, that the bank violated federal and state securities laws in relation to residential mortgage-backed securities (RMBS) trusts purchased by the GSEs between 2005 and 2007. The settlement covers all RMBS “issued, sponsored, sold, or underwritten by . . . [d]efendant between January 1, 2004 and December 31, 2008,” which is intended to include all securities for which FHFA brought claims against the bank in the District of Connecticut action. Under the terms of the agreement, the bank will pay $4.525 billion of the settlement amount to Freddie Mac, and approximately $975 million to Fannie Mae.

    Securities Federal Issues Settlement RMBS Freddie Mac Fannie Mae FHFA Litigation

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  • Election Results: Preliminary Thoughts and Reactions

    Federal Issues

    As a result of last Tuesday’s election, Republicans will control the White House and both houses of Congress in 2017. It is likely there ultimately will be some significant changes affecting financial services regulation and enforcement, but they will take time to implement. The President-elect has articulated sympathy for less regulation and opposition to the Dodd-Frank Act but also an unconventional economic populism. The Congressional Republicans have already prepared, and in some cases passed, more specific changes to limit and cabin the CFPB. We anticipate efforts focused on changing the CFPB Director and CFPB structure, reduced regulation that may encourage product innovation (particularly in the FinTech space), and potentially less emphasis on certain Department of Justice (“DOJ”) enforcement initiatives such as fair lending and the Residential Mortgage-Backed Securities (“RMBS”) task force. Nonetheless, we expect continued enforcement and supervisory activity, including by states and by prudential regulators that are less directly tied to shifting political winds.

     

    Click here to read the full special alert

     

     

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    Questions regarding the matters discussed in this alert may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.

     

    Federal Issues Banking Consumer Finance CFPB Dodd-Frank RMBS Special Alerts DOJ POTUS Fintech

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  • Connecticut AG Jepsen and Banking Commissioner Perez Resolve RMBS Investigation

    Consumer Finance

    On October 3, Connecticut AG Jepsen, alongside Banking Commissioner Jorge Perez, resolved a four-year investigation into a Connecticut-based investment bank’s residential mortgage-back securities (RMBS) practices. According to the consent order, from January 2005 to December 2008, the investment bank was the lead securities underwriter of about 250 RMBS deals with a value of more than $250 billion. The state alleged, among other things, that the bank’s due diligence process on the 250 RMBS deals was “inadequate and resulted in omissions and misstatements in the representations made to the public and investors about the securities.” The $120 million settlement is Connecticut’s largest single settlement in history.

    Banking State Issues Mortgages State AG RMBS

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  • New York Supreme Court Appellate Division Affirms Six-Year Statute of Limitations Applicable to Breach of Contract Action

    Lending

    On August 11, the Appellate Division of the New York Supreme Court First Department affirmed a trial court’s decision that the statute of limitations bars a breach of contract action brought more than six years after the seller (defendant) of mortgage loans made allegedly false representations and warranties to the purchaser (plaintiff) regarding the characteristics, quality, and risk profile of the loans. Deutsche Bank Nat’l Trust Co. v. Flagstar Capital Mkts. Corp., 2016 NY Slip Op. 05780 (N.Y. App. Div. Aug. 11, 2016). In this case, the plaintiff purchased loans from defendant with closing dates between December 7, 2006 and May 31, 2007. Through various assignments, the loan pool was conveyed to a Trust, of which the plaintiff was a trustee, securitized, and sold to investor certificateholders on October 2, 2007. In 2013, at the request of one of the certificateholders, an underwriting firm performed a forensic review of the loans underlying some of the certificates and found that “a large number of the loans breached representations and warranties made by defendant regarding the quality and characteristics of the loans.” Although the defendant was notified of the breaches, it failed to comply with the repurchase protocol set forth in the agreement between the seller and purchaser.

    The plaintiff commenced action against the defendant on August 30, 2013, subsequently filing a complaint on February 3, 2014 “seeking specific performance, damages and/or rescission, and asserting a cause of action for breach of contract  and a cause of action for breach of the implied covenant of good faith and fair lending.” The defendant moved to dismiss the case on the ground that the action was time barred, since it began more than six years after the plaintiff’s accrual date of the loans. The trial court ruled in favor of the defendant, reasoning that in the Court of Appeal’s recent decision in ACE, it “held that a breach of contract claim in an RMBS put-back action accrues on the date the allegedly false representations and warranties were made.” ACE Sec. Corp. v DB Structured Products, Inc., 36 N.E.3d 623 (N.Y. June 11, 2015). The Appellate Division affirmed, holding that “New York's statutes of limitation codify the public policies of ’finality, certainty and predictability that [our] contract law endorses’ (ACE, 25 NY3d at 593). The parties' accrual provision runs afoul of these important policies.”

    RMBS

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  • New York Supreme Court Appellate Division Reverses Trial Court Ruling in RMBS Case

    Lending

    On August 11, the Appellate Division of the New York Supreme Court First Department reversed a trial court’s decision and held that the trustee plaintiff’s allegations against a financial institution were sufficient to support breach of contract and negligence claims arising from the securitization and sale of residential mortgages. Morgan Stanley Mortg. Loan Trust 2006-13ARX v. Morgan Stanley Mortg. Capital, 2016 NY Slip Op. 05781 (N.Y. App. Div. Aug. 11, 2016). According to the plaintiff, the defendant’s alleged breach of its contractual duty to notify the trustee of defective loans resulted in the sale of “virtually worthless” residential mortgage-backed securities (RMBS) to outside investors. The plaintiff further alleged that the defendant failed to “adhere to the barest minimum of underwriting standards,” claiming that many of loans had incorrect and/or unsatisfactory debt-to-income ratios and that the defendant represented the loans to appear less risky than they actually were. In reversing the lower court’s ruling that the “complaint did not contain facts to sufficiently support” an independent, separate claim for breach of contract, the court cited its recent decision in Nomura Asset Acceptance Corp. Alternative Loan Trust v. Nomura Credit & Capital, Inc., stating that “under similar RMBS agreements, a seller’s failure to provide a trustee with notice of material breaches it discovers in the underlying loans states an independently breached contractual obligation, allowing a plaintiff to pursue separate damages” (internal citation omitted).

    RMBS

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  • FDIC Settles with Financial Institutions to End RMBS Claims

    Lending

    On June 2, the FDIC announced a settlement with eight financial institutions to resolve federal and state securities law claims based on the institutions’ residential mortgage-backed securities (RMBS) practices. As the receiver for five failed banks from November 2011 through August 2012, the FDIC filed six lawsuits for alleged violations of federal and state securities laws. Specifically, according to the FDIC, the eight financial institutions made misrepresentations in offering documents in connection with the sale of 21 RMBS to the five failed banks. The $190 million in settlement funds will be distributed among the receiverships for the five failed banks.

    FDIC RMBS

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  • Illinois AG Settles with New York Investment Bank Over RMBS Practices

    Lending

    Last week, Illinois AG Madigan announced a $41 million settlement with a New York-based investment bank for its alleged misconduct in connection with the marketing and selling of at risk residential mortgage-backed securities (RMBS) prior to the economic collapse in 2008. Specifically, according to an investigation led by AG Madigan’s office, the investment bank allegedly failed to disclose the actual risk of RMBS investments. Under the terms of the settlement, $16 million of the settlement funds will go toward consumer relief, with the remainder being distributed to the Teachers Retirement System of the State of Illinois, the State Universities Retirement System of Illinois, and to the Illinois State Board of Investment. Finally, the investment bank’s settlement with Illinois is part of a $5 billion national settlement led by the DOJ – as well as additional federal entities – and the state AGs of New York and California.

    State AG RMBS

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  • New York AG Schneiderman Announces Settlement with New York-Based Financial Institution Regarding RMBS Practices

    Lending

    On February 11, New York AG Schneiderman announced a $3.2 billion settlement that includes $550 million for New York with a New York-based financial institution over its alleged deceptive practices involving the sales and issuance of Residential Mortgage-Backed Securities (RMBS) leading up to the financial crisis. According to the settlement agreement, the financial institution (i) increased the acceptable risk levels for loans held in its securitized pools; (ii) securitized certain loans that did not comply with underwriting guidelines and did not have adequate compensating factors; (iii) purchased and securitized loans which its credit and compliance team advised it not to purchase; and (iv) allowed for the purchase of loans it knew to be risky without a loan file review for credit and compliance. The settlement requires the financial institution to (i) provide at least $400 million in consumer relief directly to struggling families and communities across the state; and (ii) pay $150 million “in consideration for the settlement of potential legal claims by the NYAG as compensation for harms to the State of New York allegedly resulting from [its] creation, packaging, marketing, underwriting, sale, structuring, arrangement, and issuance of RMBS in 2006 and 2007.”

    New York AG Schneiderman’s settlement is in conjunction with other settlements with members, including the DOJ, of the RMBS Working Group, which was formed in 2012 as a joint federal and state enforcement effort for investigating the RMBS market for fraud and abuse. Finally, in a similar effort last week, the FDIC, as the receiver of affected banks, announced an RMBS-related settlement with the same New York-based financial institution.

    State AG RMBS

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  • FDIC Announces RMBS-Related Settlement with New York-Based Financial Institution

    Lending

    On February 2, the FDIC announced a settlement for more than $62 million with a New York-based financial institution to resolve “federal and state securities law claims based on misrepresentations in the offering documents for 14 RMBS [residential mortgage-backed securities] purchased by three failed banks.” The FDIC, as the receiver of the three failed banks, filed four lawsuits from February 2012 to January 2014 against the financial institution and other defendants for their alleged involvement in the sale of the RMBS to the three failed banks. These lawsuits are four of the 19 RMBS-related lawsuits that the FDIC has filed, as of December 31, 2015, on behalf of eight failed institutions.

    FDIC RMBS

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  • DOJ and State AGs Announce Settlement with Credit Rating Agency

    Securities

    On February 3, the DOJ announced a settlement agreement with a large credit rating agency and its parent company for $1.375 billion – a record amount according to the DOJ – in connection with the agency’s alleged “scheme to defraud investors in structured financial products known as Residential Mortgage-Backed Securities (RMBS) and Collateralized Debt Obligations (CDOs).” In 2013, the DOJ, along with 19 states plus the District of Columbia, brought the lawsuit against the agency for misrepresenting the securities’ true credit risks through inflated ratings, which led investors to suffer substantial losses right before the financial crisis. While the agency is neither admitting to nor denying the allegations, it has agreed to (i) “retract an allegation that the United States’ lawsuit was filed in retaliation for the defendant’s decision with regard to the credit of the United States;” (ii) abide by the consumer protection statutes set forth by the settling states and DC; and (iii) answer requests from any of the states and DC regarding information on potential violations of the consumer protection laws.

    State AG RMBS DOJ Enforcement Credit Rating Agencies

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