Housing Finance

Class Action Complaint Alleges Conspiracy to Fix CDS Market

By Joseph Santiesteban, J.D. Candidate 2014 | Posted on

A group of institutional investors recently filed a class action complaint against some of the world’s largest banks alleging a conspiracy fix prices and monopolize the market for Credit Default Swaps (“CDS”) in violation of the Sherman Act § 1.  Defendants include Bank of America, Barclays, Citibank, and Goldman Sachs.   The complaint also names the International Swaps and Derivatives Association (“ISDA”), a financial trade association, which the complaint alleges is controlled by the defendant banks.  The plaintiffs are claiming potentially billions of dollars in damages.

A credit default swap is a method of transferring the risk of default for a financial instrument.  The purchaser pays a fixed payment to the seller in exchange for the promise to pay off the underlying debt in the event of a default.  The complaint alleges that because of the CDS market structure is unregulated and over the counter, every transaction must be with one of the defendant banks.

The complaint characterizes the CDS market as “starkly divided” between the defendant banks “who control and distort the market” and the plaintiffs “who, in order to participate in the market, must abide their distortions.”  The complaint alleges that this is the result of an opaque trading environment in which the defendant banks manipulate the bid-ask spreads through their negotiations with individual traders.  These manipulations cost the plaintiffs billions of dollars, says the complaint.  Plaintiffs allege that several of their attempts to create and regulated exchange were rebuffed by defendants.

Both the DOJ and the European Commission have been conducting their own investigations into these activities.  In March, the EU indicated that “ISDA may have been involved in a coordinated effort of investment banks to delay or prevent exchanges from entering the credit derivatives business.”

The Week in Review: SEC Nomination, Symposium, DOJ and FDIC

By Christopher Hammond, J.D. Candidate 2015 | Posted on

Mary Jo White, President Obama’s pick to be the next S.E.C. chairwoman, took a tough stance on Wall Street regulation yesterday, testifying before the Senate Banking Committee.  Ms. White is a former federal prosecutor, although she has also worked as a corporate Wall Street defense attorney.  She appears likely to win confirmation (as early as next week).  If and when she does, banks should expect rigorous oversight from the government’s top securities regulation agency.  During her testimony, Ms. White said:  “I don’t think there’s anything more important than vigorous and credible enforcement of the securities laws.”  For more, see the NYTimes.  On a related note, Senator Warren (D-MA) has continued to push for increasing bank oversight and regulation.

The Berkeley Center for Law, Business and the Economy and the Berkeley Business Law Journal will be hosting their 2013 symposium on the JOBS Act this Friday, March 15.  Registration is required.  See a previous post for a complete description of this year’s symposium lineup.

Federal prosecutors recently caught a break in an ongoing offshore tax evasion investigation, centered around Swiss financial advisor Beda Singenberger.  In a letter mailed to the United States, Singenberger unintentionally included a list of approximately 60 U.S. ‘clients.’  “The government has mined that list to great effect and prosecuted a number of people who were on that list,” according an assistant U.S. Attorney working the case.  The government continues its crack-down on unreported foreign accounts, which included a $780 million settlement with UBS, Switzerland’s largest bank.  For more, see Bloomberg. 

A recent Los Angeles Times report shows that the FDIC has been quietly settling actions against banks involved in unsound mortgage loans—including “no press release” terms that have kept the matters quiet unless and until it received a “specific inquiry.”  The newspaper claims that this practice constitutes “a major policy shift from previous crises, when the FDIC trumpeted punitive actions against banks as a deterrent to others.”  Under a Freedom of Information Act request, the Times recovered more than 1,600 pages of FDIC settlement documents “catalog[ing ] fraud and negligence.”  Yesterday, Forbes picked up on the story, asking, “Is the FDIC Protecting Banks from Bad Press?”  For more, see the LATimes and Forbes.

 

From the Bench: Wells Fargo’s Contribution to Mortgage Settlement Does Not Bar Some Future Claims

By Mark Rutter, J.D. Candidate 2015 | Posted on

Wells Fargo’s bid to block the government’s most recent charges against it stemming from the mortgage crisis—primarily alleged violations of the False Claims Act and the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”)—took a blow earlier this month when a court ruled that its $5 billion contribution to the multi-bank, $25 billion settlement in April over foreclosure practices did not preclude the new charges.  Previous coverage of Wells Fargo’s attempt to preclude the litigation is here.  U.S. District Judge Rosemary Collyer ruled that the settlement did not bar all civil or administrative claims against Wells Fargo, including those under the False Claims Act, paving the way for prosecutors in the United States Attorney’s Office for the Southern District of New York to move forward with the suit.

Collyer’s decision left the bank’s lawyers, led by teams from Fried Frank and K&L Gates, vehemently protesting the court’s interpretation of contested language in the settlement.  According to Collyer, that language indicated the government retained the right to sue Wells Fargo for material violations of Housing and Urban Development/ Fair Housing Administration (“HUD-FHA”) requirements, only barring claims based on false annual certifications regarding the bank’s compliance with those requirements.  Collyer stated that the current charges do not fall under the precluded claims, finding Wells Fargo ignored the plain language of the settlement in coming to a mistaken interpretation.   As a result, the government can bring allegations under the False Claims Act in the current suit.

Collyer, however, did not address the pending case directly.  The court for the Southern District of New York will still have to make a final determination as to whether the prosecution has pled barred claims as the case moves forward.

The defense team has strongly attacked the government’s charges in its court filings, framing the current charges as part of a broader effort to avoid honoring FHA and HUD commitments to insure thousands of defaulting mortgages as it attempts to wrongly implicate the financial industry for the defaults.

The prosecution has not yet filed its response to Wells Fargo’s motion to dismiss the current suit.

CFPB Announces “Ability to Repay” Rule for Mortgage Lenders

By Amanda Berloni, L.L.M. Candidate 2013 | Posted on

The Consumer Financial Protection Bureau has announced a new rule (the “Ability-to-Repay rule”) requiring mortgage lenders to ensure that potential borrowers will be able to repay their mortgages.  The CFPB is charged with amending Regulation Z, which carries out the Truth in Lending Act.  The CFPB also implements the ability-to-repay requirements under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”).  Under Dodd-Frank, creditors must make a reasonable and good faith determination that borrowers have a reasonable ability to repay the loan.

The Ability-to-Repay rule is aimed at protecting American consumers.  According to the CFPB Director, the “Ability-to-Repay rule protects borrowers from the kinds of risky lending practices that resulted in so many families losing their homes.”

Under the new rule:

  • 1. Lenders are required to obtain and verify financial information from potential borrowers,
  • 2. Lenders must evaluate and conclude that potential borrowers have sufficient assets or income to repay the loan, and
  • 3. Lenders cannot use lower, introductory “teaser” interest rates (which cause monthly payments to jump to unaffordable levels) to base their evaluation of a potential borrower’s ability to repay the loan.

In assessing whether a borrower will be able to repay their loan, lenders must generally consider the following underwriting factors:  1) current or reasonable expected income or assets, 2) current employment status, 3) the monthly payment, 4) monthly payment on any simultaneous loan, 5) the monthly payment for mortgage-related obligations, 6) current debt obligations, 7) monthly debt-to-income ratio, and 8 ) credit history.

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The Week in Review: New Mortgage Rules and Citigroup’s Q4 Hit by Settlement

By Christopher Hammond, J.D. Candidate 2015 | Posted on

In an ongoing effort to protect homeowners facing foreclosure, the Consumer Financial Protection Bureau has issued new rules for mortgage servicers.  The rules, which won’t take effect until January 2014, include provisions requiring banks to consider and respond to loan modification applications submitted at least 37 days before a schedule foreclosure.  Similarly, servicers must inform borrows of alternatives to foreclosure and will not be able to begin foreclosure proceedings while homeowners are seeking a loan modification.  The rules also severely limit some of the lending practices (e.g. inflated up-front fees, interest-only payments, and high debt-to-income ratios) considered predatory by consumer groups. For more detail, see articles by WashPo and CNN.

Citigroup’s Q4 earnings report underperformed this morning – in large part due to its $1.29 billion in legal costs – and the company’s stock dropped 3.4% in early trading.  While most banks are still purging their balance sheets, there is worry that we may not have seen the end of these mortgage-crisis-era liabilities.  Citigroup’s CFO, John Gerspach, hinted on a Thursday conference call:  “I think that the entire industry is still looking at some additional settlements that are still yet to appear.”  For more, see NYTimes and Reuters.  [Bank of America’s Q4 was hit by settlements as well:  WSJ]

Saudi Arabia’s Real-Estate Finance Laws

By Maha Al-fozan, LL.M. Candidate 2013 | Posted on

In July 2012, Saudi Arabia witnessed the official launch of the real-estate finance industry as part of the country’s economic financial development plans.  To promote the local competition between banking and other financial sectors, and the economy’s overall global competitiveness, non-banking corporations may now finance real estate in Saudi Arabia.

The Real Estate Development Fund (“REDF”) is the country’s main provider of housing finance.  REDF was unable to meet the rapidly increasing demand, while other real estate financing was limited due to absence of a well-structured regulatory framework.  For example, the industry lacked effective land registries and foreclosure regulations for properties in default.  Individual real estate financing was done against the transfer of title deeds rather than as an official mortgage.  In addition, lenders have been conservative with their loan standards, resulting in a low mortgage penetration rates.

Making mortgages available to public will address the imbalances occurring in the market with supply twisted to the high end.  The new Saudi laws tackle the chronic shortage of home ownership, particularly in the affordable middle- and lower-end markets.  More financing opportunities are needed, even though additional time may be required for the market to safely adopt such laws.

These laws are tools to open safe and continuous investment channels.  They encourage national economy leaders to diversify income sources and create job opportunities and investments in the country.  They also satisfy growing demands for appropriate and safe housing offers.  These steps aim to develop mechanisms that preserve homeownership rights, while stimulating financial institutions to lend more frequently, reduce the cost of mortgage financing and provide differentiated products for multiple segments of society.

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Some Claims in DOJ Lawsuit Against Wells Fargo Potentially Precluded by Mortgage Settlement

By Mark Rutter, J.D. Candidate 2015 | Posted on

Prior to filing its recent lawsuit against Bank of America, as discussed here, the United States Attorney for the Southern District of New York announced last month it had filed suit against another major U.S. bank for alleged reckless underwriting and false representations made during the sub-prime mortgage crisis—this time, against the largest American home lender, San Francisco-based Wells Fargo, N.A.

Filed in conjunction with the U.S. Department of Housing and Urban Development (“HUD”), the suit seeks treble damages and civil penalties for violations of the False Claims Act and the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”). Wells Fargo faces a range of charges including a breach of fiduciary duty, unjust enrichment, and false certifications to HUD, as well as charges under the False Claims Act of knowingly or recklessly making false claims regarding its FHA loans and making false statements in support of those claims.

Wells Fargo insists that the current lawsuit is barred by its five billion dollar settlement over its foreclosure practices in April, arguing that the new claims fall into the categories of claims released per the settlement—servicing, foreclosure, and origination liability claims. The settlement does allow the government and borrowers to preserve claims that include criminal prosecutions, claims relating to securitization of mortgage loans, claims of discrimination in lending practices, and individual or class action claims brought by homeowners and investors.

Most pertinently, the settlement did not preclude the new charges if the prosecution can prove the bank knowingly lied to the FHA about specific loans meeting the program’s eligibility requirements. However, Wells Fargo firmly maintains that the government can only prosecute individual loans under this exception, meaning many of the new charges would nonetheless be prevented.

The defense has submitted a filing to U.S. District Judge Rosemary Collyer, who presided over the settlement, in an effort to block the government from pursuing the new charges. It remains to be seen whether Judge Collyer will take any action to block the new suit.

This lawsuit comes amid several other suits against the nation’s largest lenders, including Bank of America, as the government seeks damages for the banks’ roles in the subprime mortgage crisis.

Mortgage Closing Costs May Rise Under the New Rules to Prevent Illegal House “Flipping”

By Mark Rutter, J.D. Class of 2015 | Posted on

In August 2012, six federal financial regulatory agencies issued a proposed rule to implement Section 1471 of the Dodd-Frank Act which sets forth appraisal requirements for “higher-risk” mortgage loans.

The intended purpose of the proposed rule is to tighten valuation standards for homes in order to reduce the risk of appraisal fraud, a move meant to reassure creditors, borrowers, and investors alike. Section 1471 was created as part of Congress’ intention to prevent the use of false or inflated appraisals in obtaining mortgages. If the proposed rule is finalized without amendment, lenders seeking to issue high-risk mortgage loans will be “unable to value properties on the basis of broker-price opinions, automated valuations, or drive-by appraisals”. The proposed rule would affect mortgages with annual percentage rates (APRs) at designated levels above the Average Prime Offering Rate (APOR). First-lien loans (such as standard mortgages) with an APR 1.5 percentage points above the APOR would be classified as a higher risk mortgage under the proposed rule, while first-lien jumbo loans with APRs 2.5 percentage points above, and subordinate-lien loans with an APR 3.5 percentage points above the APOR would similarly be considered higher-risk.

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Bill Falik Presents “Saving Homes, Saving Cities: Fixing the Mortgage Crisis Locally” on 9/6/12

By Joseph Santiesteban, J.D. Candidate 2014 | Posted on

On Thursday, September 6th, Berkeley Law Adjunct Professor Bill Falik will give a presentation on his work with Mortgage Resolution Partners (MRP), an organization advocating and seeking to fund local governments’ use of eminent domain to purchase underwater mortgages. The presentation is titled: Saving Homes, Saving Cities: Fixing the Mortgage Crisis Locally. The event will be held in Room 110 of UC Berkeley School of Law at 12:45 and is sponsored by the Berkeley Center for Law, Business and the Economy and the Berkeley Business Law Journal. CLE credit is available and lunch will be provided.

Various cities across the country are considering the use of eminent domain to purchase underwater mortgages. Under the proposal, cities would use eminent domain to condemn the underwater mortgages (not the underlying property), at which point the city would purchase the loans for market value and refinance the loans to the homeowner at a principle balance equal to the current market value of the home.

This proposal has spawned predictions of dire consequences from members of the mortgage finance industry. Critics of the proposal argue that it is unconstitutional and would harm the mortgage market. Criticism has been so fierce as to prompt Lt. Governor of California Gavin Newsom to call on the Securities Industry and Financial Markets Association to stop threatening local officials in San Bernardino, a city considering the proposal.

Adjunct Professor Falik’s presentation will focus on MRP’s primary goal—to reduce the devastating health, safety, and welfare costs of underwater mortgages, foreclosures, and abandoned properties, leading to crime and blight, as well as depressed economic activity. He will argue that principal reduction is the most effective way to break the mortgage logjam that evicts families, decimates communities, paralyzes the banking system, and holds back economic recovery.

If you would like to attend the presentation, please RSVP to BCLBE@law.berkeley.edu

National Mortgage Servicing Reform Proposals are Under Consideration

By James Nguyen, J.D. Class of 2013 | Posted on

As the debate over how to reform the housing finance market takes a back seat to the 2012 General Election, Dodd-Frank’s statutory changes to mortgage servicing will see no delay in its implementation.  On April 10, 2012, the Consumer Financial Protection Bureau released its first set of proposed mortgage servicing rules:

“The proposed rules currently under consideration aim to protect consumers from surprises by directing servicers to provide:

  • Clear monthly mortgage statements that explicitly breakdown principal, interest, fees, escrow, and due dates
  • Warnings before adjusting interest rates on certain adjustable rate mortgages (ARMs) that explain how the new rate was determined, when it will take effect, dates of future adjustments, and a list of alternatives for consumers to consider
  • Options for avoiding expensive “forced-placed” insurance, which is insurance charged to borrowers by servicers when their existing insurance appears to have lapsed
  • Early outreach to struggling borrowers that informs them of potential options to avoid foreclosure

We also want to address the issue of consumers getting the “run-around” when dealing with servicers.  To accomplish this, the Bureau is considering proposals that would require:

  • Payments to be credited to consumer accounts the day payment is received
  • Implementing new policies and procedures so that records are kept up-to-date and accessible
  • Quickly addressing and correcting errors
  • Giving homeowners direct and ongoing access to servicer staff members who have access to the homeowners’ records and can actually help address their issue(s)”

The rules are scheduled to become effective in early 2013 unless the Bureau issues finals rules first.  An outline of the proposals under consideration was also posted on the Bureau’s website.

To learn more about these proposed changes to mortgage servicing as well as other housing reforms arising out of the financial crisis, please register for “The Foreclosure Crisis: Challenges and Solutions to the Mortgage Meltdown,” Friday, April 13, 2012 at the International House on the U.C. Berkeley Campus, and stay tuned as we live-blog the event throughout the day.