This week’s Department of Justice “Catch of the Week” is shared between Deutsche Bank and Credit Suisse. On Tuesday, the two European-based banking giants agreed to pay more than $12 billion between them to resolve charges they misled investors in the packaging, securitization, marketing, sale and issuance of residential mortgage-backed securities (RMBS) in the years leading up to the Great Recession. The $7.2 billion Deutsche Bank agreed to pay is the largest RMBS resolution in what has been a string of multi-billion dollar settlements. Credit Suisse will pay $5.28 billion in its settlement. See DOJ Press Releases here and here.
As part of the settlements, both banks agreed to a detailed Statement of Facts describing how they knowingly made false and misleading representations to investors about the characteristics of the billions of dollars of mortgage loans they securitized in RMBS. These included:
- Representing to investors that loans securitized in their RMBS complied with the applicable underwriting guidelines when in fact the loans were being underwritten to anyone with “half a pulse.”
- Misrepresented that loans had been reviewed to ensure the ability of borrowers to repay.
- Concealing from investors that significant numbers of borrowers had second liens on their properties.
- Purchasing and securitizing loans with substantial defects to provide “flexibility” to the mortgage originators on whom the banks’ RMBS programs depended for a continued supply of loans.
- Securitizing loans originated based on unsupported, overvalued and fraudulent appraisals.
In announcing the twin settlements, the government made it clear it was holding the banks accountable for what it viewed as their significant contribution to the financial crisis. Attorney General Loretta E. Lynch said the Deutsche Bank resolution holds the bank “accountable for its illegal conduct and irresponsible lending practices, which caused serious and lasting damage to investors and the American public . . . [and] contributed directly to an international financial crisis.” She had similar harsh words for Credit Suisse: “Today’s settlement underscores that the Department of Justice will hold accountable the institutions responsible for the financial crisis of 2008. Credit Suisse made false and irresponsible representations about residential mortgage-backed securities, which resulted in the loss of billions of dollars of wealth and took a painful toll on the lives of ordinary Americans.”
Under the Deutsche Bank settlement, the bank will pay a $3.1 billion civil penalty under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) and provide $4.1 billion in relief to underwater homeowners, distressed borrowers and affected communities. Under its parallel settlement, Credit Suisse will pay a $2.48 billion civil penalty under FIRREA and provide $2.8 billion in relief to underwater homeowners, distressed borrowers and affected communities, in the form of loan forgiveness and financing for affordable housing.
These settlements follow on the heels of last week’s $864 million settlement with Moody’s arising from Moody’s role in providing credit ratings for RMBS and Collateralized Debt Obligations, which according to the government “contribut[ed] to the worst financial crisis since the Great Depression.” It also follows a year in which the government had numerous other nine and ten-figure mortgage fraud settlements, the top-10 of which resulted in combined payouts totaling almost $10 billion.
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