- Quicken Loans Inc. argues that its suit against the federal government is valid because it is more than just a fraud case. It claims that it is about broader issues with government housing programs.
- A class action suit against JPMorgan Chase Bank NA will not be dismissed over failure to file timely mortgage satisfactions even though one of the plaintiffs rejected a settlement offer for more than she could get from a court judgment.
- An administrative judge denied that the SEC had shown fraud in commercial mortgage-backed securities suit against Standard & Poor’s former executive, Barbara Duka, because the SEC failed to show that S&P had done anything wrong, let alone Duka.
- IKB Deutsche Industriebank AG’s suit against Goldman Sachs Group Inc. remains intact for losses after a $73.2 million purchase of residential mortgage-backed securities. Goldman Sachs argued that the suit was beyond the German 3-year statute of limitations.
- Law360 compiles lists of “The Top Banking Cases In The First Half of 2015.”
Tag Archives: Securities and Exchange Commission
Monday’s Adjudication Roundup
- The CFPB increased PHH Corp.’s penalty to $109 million from $6.4 million on appeal, while upholding an administrative judge’s ruling that the firm was involved in a mortgage insurance kickback scheme.
- A class of PHH borrowers have been granted cert to the U.S. Supreme Court alleging that PHH Corp. violated the Real Estate Settlement Procedures Act.
- NY Court of Appeals bars mortgage-backed securities suit for $330 million against Deutsche Bank AG due to a six-year statute of limitations that started when the contract was signed.
- Nomura Holdings Inc. is appealing $806 million verdict in suit brought by the Federal Housing Finance Agency for selling bad mortgage-backed securities to Fannie Mae and Freddie Mac.
- The Securities and Exchange Commission brought suit against a New York broker for $4.1 million for allegedly selling unregistered securities through several entities.
Reiss on Big Kickback Penalty
Law360 quoted me in CFPB Ruling Adds New Front In Administrative Law Fight (behind a paywall). The story opens,
Consumer Financial Protection Bureau Director Richard Cordray’s decision last week upholding an administrative ruling against PHH Mortgage Corp. and jacking up the firm’s penalty highlights concerns industry has about the bureau’s appeals process, and it adds to a growing battle over federal agencies’ administrative proceedings.
Cordray’s June 4 decision in the PHH case marked the first time the bureau’s administrative appeals process was put to the test. And the result highlighted both the power that Cordray has as sole adjudicator in such an appeal and his willingness to review a decision independently and go against his enforcement team, at least in part, experts say.
But because PHH has already vowed to appeal the decision, the structure of the CFPB’s appeals process could be put in play, and it could be forced to change — a battle that comes as the U.S. Securities and Exchange Commission is also facing challenges to its administrative proceedings.
The way the CFPB handles administrative appeals “might be one of the issues that the court of appeals might be asked to consider,” said Benjamin Diehl, special counsel at Stroock & Stroock & Lavan LLP.
In the case before Cordray, PHH had been seeking to overturn an administrative law judge’s November 2014 decision that found it had engaged in a mortgage insurance kickback scheme under the Real Estate Settlement Procedures Act, or RESPA.
Cordray agreed with the underlying decision, but he found that Administrative Law Judge Cameron Elliot incorrectly applied the law’s provisions when assessing the penalty PHH should face.
And when Cordray applied those provisions in a way that he found to be correct, PHH’s penalty soared from around $6.4 million to $109 million, according to the ruling.
The reasoning behind Cordray’s decision irked lenders, which say the CFPB director dismissed precedent on mortgage reinsurance, including policies from the U.S. Department of Housing and Urban Development and judicial interpretations of the statute of limitations on RESPA claims.
“If the rules are going to change because an agency can wave a magic wand and change them, that’s disconcerting,” Foley & Lardner LLP partner Jay N. Varon said.
The rise in penalties highlighted both the risk that firms face in an appeal before the CFPB and Cordray’s desire to send a message to companies that he believes violate the law, said David Reiss, a professor at Brooklyn Law School.
“It is unsurprising that Cordray would take a position that is intended to have a significant deterrent effect on those who violate RESPA, and I expect that he wanted to signal as much in this, his first decision in an appeal of an administrative enforcement proceeding,” Reiss said.
Reiss on EB-5 Green Card Reform
Ellis Island
GlobeSt.com quoted me in Congress Moves to Revamp EB-5. It reads in part,
Last week Senate Judiciary Committee Chairman Chuck Grassley and ranking member Senator Patrick Leahy introduced bipartisan legislation to reauthorize and reform the EB-5 Regional Center program.
This did not come as a surprise to the commercial real estate industry, which has been watching the approaching Sept. 30, 2015 deadline with a mixture of dread and anticipation.
Simply put, the program has become an increasingly popular funding source for projects, David Cohen, a shareholder at Brownstein Hyatt Farber Schreck in Washington DC, tells GlobeSt.com.
“As the popularity of the EB-5 program has grown in the last few years, so too has the scope of the deals its being used to fund,” he says. “There is far more money at stake than there was even a few years ago.”
The changes proposed in the bill — officially called the American Job Creation and Investment Promotion Reform Act — touched upon some of the more controversial parts of the program. It proposes strengthening oversight by Department of Homeland Security and Securities and Exchange Commission oversight and putting in place measures that would discourage fraud. Overall, national security would have a greater focus this time around.
* * *
The EB-5 program “has a very interesting mix of policy goals, including immigration, community development and employment ones,” says David Reiss, a law professor at Brooklyn Law School and research director of the Center for Urban Business Entrepreneurship (CUBE).
It also has a great deal of flexibility – and many say too much flexibility, he continues. “For instance, companies have been able to characterize hot locations in Brooklyn and Manhattan as areas of high unemployment by defining the targeted employment area expansively,” he tells GlobeSt.com.
“For instance, the biggest real estate project in Brooklyn, Pacific Park — formerly known as Atlantic Yards –used nearby neighborhoods with high unemployment for an EB-5 investment located in a relatively low unemployment area,” he says.
In short, “there is a lot of talk of reform of the program that comes from all different directions – raise the minimum investment amount! – ensure that the targeted employment area is more narrowly drawn! – establish national standards!” Reiss says.
“But it is too early to tell which reforms might stick.”
Monday’s Adjudication Roundup
- Former Freddie Mac executives, who were accused of lying about Freddie’s exposure to subprime mortgages before the financial crisis, settled with the SEC.
- Citibank shareholders slam the Bank’s motion to dismiss a case over mortgage-backed securities worth more than $17 billion as NY federal courts have rejected similar arguments to dismiss similar cases.
- The Second Circuit dismisses a class action against Royal Bank of Scotland PLC finding that the bank did not lie about its exposure to residential mortgage-backed securities.
- DC federal judge certified a class action of evicted homeowners, with a lead representative who lost his home over a $134 unpaid tax bill. The court will decide whether district law creates a property interest in equity, if its tax-sale statutes effect a taking of the property and if class members were properly compensated.
S&P’s Upbeat Outlook on Mortgage Market
S&P posted U.S. RMBS Roundtable: Mortgage Origination And Securitization In The Post-Qualified Mortgage/Ability-To-Repay Market. The roundtable discussion offers views on many aspects of the 2015 mortgage market, but I found this passage to be particularly interesting:
Originators agreed loans that fall outside of the safe harbor by virtue of interest-only (IO) features have been and will continue to be attractive non-QM lending products. These loans have been originated post-crisis, and originators expect to continue lending to high-quality borrowers with substantial equity in their properties. There was general consensus that IO loans should not have been automatically excluded from QM treatment.
However, large bank depository lenders have shown a desire to originate and hold larger balance IO loans on their balance sheets rather than including them in securitizations. One participant from a major depository institution indicated that, given the increasing IO concentration on those institutions’ balance sheets, there may be a desire to securitize these loans upon meeting balance sheet thresholds. (1)
After Dodd-Frank, there was a lot of concern that the Qualified Mortgage and Ability-to-Repay rules would shut down the mortgage markets. It seems pretty clear to me that lenders are figuring out how to navigate both the plain-vanilla world of the Qualified Mortgage and the exotic world of the non-Qualified Mortgage, with its interest-only and other non-prime products. Lenders are still figuring out how far afield they can roam from a plain-vanilla product, but that is to be expected during a major transition such as the one from the pre- to the post-Dodd-Frank world.
SEC Update on Rating Agency Industry
The staff of the U.S. Securities and Exchange Commission has issued its Annual Report on Nationally Recognized Statistical Rating Organizations. The report documents some significant problems with the rating agency industry as it is currently structured. The report highlights competition, transparency and conflicts of interest as three important areas of concern.
Competition. There are some of the interesting insights to be culled from the report. It notes that “some of the smaller NRSROs [Nationally Recognized Statistical Rating Organizations] had built significant market share in the asset-backed securities rating category.” (16) That being said, the report also finds that despite “the notable progress made by smaller NRSROs in gaining market share in some of the ratings classes . . . , economic and regulatory barriers to entry continue to exist in the credit ratings industry, making it difficult for the smaller NRSROs to compete with the larger NRSROs.” (21)
Transparency. The report also notes that “there is a trend of NRSROs issuing unsolicited commentaries on solicited ratings issued by other NRSROs, which has increased the level of transparency within the credit ratings industry. The commentaries highlight differences in opinions and ratings criteria among rating agencies regarding certain structured finance transactions, concerning matters such as the sufficiency of the credit enhancement for the transactions. Such commentaries can serve to enhance investors’ understanding of the ratings criteria and differences in ratings approaches used by the different NRSROs.” (23) The report acknowledges that this is no cure-all for what ails the rating industry, it is a positive development.
Conflicts of Interest.Conflicts of interest have been central to the problems in the ratings industry, and were one of the factors that led to the subprime bubble and then bust of the 2000s. The report notes that the “potential for conflicts of interest involving an NRSRO may continue to be particularly acute in structured finance products, where issuers are created and operated by a relatively concentrated group of sponsors, underwriters and managers, and rating fees are particularly lucrative.” (25) There is no easy solution to this problem and it is important to carefully study it on an ongoing basis.
The staff report is valuable because it offers an annual overview of structural changes in the ratings industry. This year’s report continues to highlight that the structure of the industry is far from ideal. As the business cycle heats up, it is important to keep an eye on this critical component of the financial system to ensure that rating agencies are not being driven by short term profits for themselves at the expense of long-term systemic stability for the rest of us.
