DOJ Announces $1.5 Billion Settlement with Multinational Corporation over Allegedly Faulty RMBS
The DOJ recently settled with a multinational conglomerate to resolve claims brought under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) that, contrary to representations made by a mortgage origination subsidiary of the multinational, a majority of the mortgage loans the subsidiary originated and sold for inclusion in residential mortgage-backed securities (RMBS) between 2005 and 2007 were fraudulent or otherwise defective. The multinational agreed to pay a civil money penalty of $1.5 billion.
According to the settlement, the subsidiary “made representations about the quality and attributes of its mortgage loans, as well as about its quality and fraud controls, to investment bank purchasers and RMBS investors, including federally insured financial institutions.” At the same time, however, there were significant deficiencies with respect to the subsidiary’s quality control. For example, underwriters had the ability to accept and underwrite loans outside of their guidelines without appropriate documentation or signoff, and sales personnel could approve loans that the subsidiary’s own quality control auditors had determined were potentially fraudulent or otherwise defective.
Additionally, if an investment bank were to reject a loan due to defects in the loan file, the DOJ alleges the subsidiary would attempt to find a new purchaser, without disclosing the previous rejection or identifying the alleged defects. In one instance, the multinational’s audit team examined a sample of fifty rejected loans and concluded that “30% of the sample had ‘significant underwriting issues’ but were resold to another third party investment bank without documentation or repair.”
The subsidiary originated and sold more than $65 billion dollars in mortgage loans between 2005 and 2007, the vast majority of which were in RMBS, which suffered losses of approximately one-third of their original principal balance.
