Bank Settles with DOJ for Alleged RMBS Misrepresentations

A large national bank recently agreed to pay more than $2 billion to settle FIRREA claims arising out of a DOJ investigation into alleged misrepresentations made by the bank to investors about the quality of mortgage loans in the bank’s residential mortgage-backed securities.

The government alleged that the bank failed to disclose to its investors that borrowers had inflated their income in a significant number of mortgage loans between 2005 and 2007.  According to DOJ, the misrepresentations resulted from an initiative to increase subprime lending by reducing requirements for stated income loans.  DOJ alleged that, in testing a sample of these loans in order to determine whether the stated income matched the loan applicant’s tax transcripts, the bank found that 70% of the tested loans had an unacceptable gap between the reported incomes.  Of those unacceptable loans, 45% allegedly had no plausible explanation for the gap.  The loans were then packaged into RMBS and sold to other financial institutions.

The DOJ’s press release is available here.