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Freddie Mac Announces Start of Modified Loans Securitization
On May 23, Freddie Mac announced that it has begun securitizing certain loans that were modified for borrowers at risk of foreclosure. The announcement explains that (i) to be eligible for securitization, loans must be current for at least six consecutive months, (ii) the modified loans are pooled into new Freddie Mac Fixed-Rate Modified Participation Certificates (Modified PCs) with new “MA-MD” prefixes, and (iii) the pools are not TBA deliverable and do not include loans modified through HAMP. Freddie Mac intends to provide additional pool-level and loan-level disclosures specific to the Modified PCs, as well as pool-level disclosure of payment history covering up to 36 months before the Modified PC issuance.
FINRA Expands Role Overseeing Equities Markets
On May 22, FINRA announced that it was selected by Direct Edge, the third largest U.S. stock exchange operator, to provide market surveillance services on behalf of Direct Edge’s two licensed stock exchanges. The agreement extends FINRA's surveillance oversight to more than 90% of U.S. equities trading volume. With this agreement, all of Direct Edge's third-party regulatory services will be consolidated with FINRA.
New York State Trial Courts Issue Opposing Opinions on MBS Claims Statute of Limitations
This week, two New York trial court justices issued diverging opinions on when the statute of limitations begins to run on claims related to the repurchase obligations of securitizers under certain MBS pooling and servicing agreements. Both courts explained that under New York law a cause of action for a breach of contract accrues at the time of the breach, and that the statute of limitations for breach of contract is six years. But the courts diverged on the question of whether the clock for claims related to repurchase obligations begins to run from the date the representations for the allegedly faulty mortgages are made, or when the securitizer fails to meet its obligations to repurchase such loans. In one case, the court held that the clock on claims by trustees that the securitizer breached its contract by failing to repurchase began to run on the date the representations were made, i.e. the date the pooling and servicing agreement closed, and dismissed the trustee’s suit because it was filed more than six years after the closing date. Nomura Asset Acceptance Corp. Alt. Loan Trust, Series 2005-S4 v. Nomura Credit & Capital Inc., No. 653541/2011, slip op. (N.Y. Sup. Ct. May 10, 2013). In a second case, the court held the opposite: the statute of limitations did not begin to run until the securitizers improperly rejected the trustee’s repurchase demand, i.e. the breach is the failure to comply, not the date of the representation. Ace Securities Corp, Home Equity Loan Trust Series 2006-SL2 v. DB Structured Prods., Inc., No. 650980/2012, 2013 WL 1981345 (N.Y. Sup. Court, May 13, 2013). Based on that holding, the court found the complaint timely filed and denied the securitizer’s motion to dismiss.
SEC Fills Enforcement Director, General Counsel Positions
On April 22, the SEC announced that George Canellos and Andrew Ceresney will share responsibilities as co-directors of the SEC’s Division of Enforcement. Mr. Canellos has been serving as Acting Enforcement Director since January. He previously had been the division’s Deputy Enforcement Director since June 2012, prior to which he served as Director of the SEC’s New York Regional Office. Mr. Ceresney previously served as a Deputy Chief Appellate Attorney in the United States Attorney's Office for the Southern District of New York, where he was a member of the Securities and Commodities Fraud Task Force and the Major Crimes Unit. Most recently, he was in private practice with recently-confirmed SEC Chairman Mary Jo White. On April 23, the SEC named Anne Small as General Counsel. Ms. Small is a former Special Assistant to the President and Associate Counsel in the White House Counsel’s Office where she advised on legal policy questions with a focus on economic issues. She previously worked at the SEC as Deputy General Counsel for Litigation and Adjudication and now becomes the first woman to be named General Counsel.
SEC Charges Bank for Understating Auto Loan Losses
On April 24, the SEC released an order charging a financial institution and two senior executives for allegedly understating millions of dollars in auto loan losses during the period leading up to the financial crisis. The SEC stated that an investigation identified an alleged failure by the institution to incorporate internal loss forecasts into financial reporting, resulting in the institution understating loan loss expense. The institution did not admit the allegations, but agreed to pay $3.5 million to resolve the charges. The SEC also alleged that the two executives caused the understatements by deviating from established policies and procedures and failing to implement proper internal controls for determining its loan loss expense. The two executives did not admit the allegations, but agreed to pay a combined $135,000 to resolve the investigation, and to cease and desist from committing or causing any violations of the relevant federal securities laws.
SEC Approves Final Investor Privacy Rule
On April 10, the SEC voted unanimously to adopt a final rule requiring broker-dealers, mutual funds, investment advisers, and other regulated entities to implement programs designed to detect and prevent identity theft. The final rule applies to SEC-regulated entities that meet the definition of “financial institution” or “creditor” under the FCRA. The final rule will take effect 30 days after publication in the Federal Register and give covered firms six months from the effective date to comply. Under the final rule, covered firms must establish policies and procedures designed to (i) identify relevant types of identity theft red flags, (ii) detect the occurrence of those red flags, (iii) respond appropriately to the detected red flags, and (iv) periodically update the identity theft program. The rule requires covered firms to provide staff training and oversight of service providers, and provides guidelines and examples of red flags to help firms administer their programs. Further, the rule requires covered firms that issue debit cards or credit cards to take certain precautionary actions when they receive a request for a new card soon after notification of a change of address for a consumer’s account.
White Sworn In as SEC Chair
On April 10, the SEC announced that Mary Jo White was sworn in as the 31st Chair of the SEC, two days after the Senate confirmed her for the position. The announcement notes that Chairman White most recently led the litigation department of a large law firm. Prior to her time in private practice, Chairman White specialized in prosecuting complex securities and financial institution frauds and international terrorism cases in her position as the U.S. Attorney for the Southern District of New York from 1993 to 2002. She also served as the First Assistant U.S. Attorney and later Acting U.S. Attorney for the Eastern District of New York from 1990 to 1993 and as an Assistant U.S. Attorney for the Southern District of New York from 1978 to 1981, where she became Chief Appellate Attorney of the Criminal Division.
Two Federal Courts Hold Government MBS Claims Were Untimely
On April 9, the U.S. District Court for the Central District of California dismissed claims brought by the FDIC as receiver for a failed bank against a financial institution related to 10 MBS certificates sold to the bank, holding that the FDIC’s claims were time-barred. Fed. Deposit Ins. Corp. v. Countrywide Secs. Corp., No. 12-6911, slip op. (C.D. Cal. Apr. 9, 2013). The court found that “a reasonably diligent plaintiff had enough information about false statements in the Offering Documents of [the firm’s] securities to file a well-pled complaint before” the statute of limitations expired on August 14, 2008. The court noted that deviations from stated underwriting guidelines and inflated appraisals had come to light prior to the expiration of the statute of limitations through “multiple lawsuits” and “numerous media sources.” The court found that it was irrelevant that the FDIC was named receiver for the bank because “[t]he FDIC [did] not have the power to revive expired claims.” Similarly, on April 8, the U.S. District Court for the District of Kansas granted, in part, a motion to dismiss federal and state claims brought by the NCUA on behalf of three failed credit unions against a financial institution related to certain MBS certificates sold to the credit unions, holding that certain NCUA claims were time-barred. Nat’l Credit Union Admin. Bd. v. Credit Suisse Secs. (USA) LLC, No. 12 Civ. 2648, 2013 WL 1411769 (D. Kan. Apr. 8, 2013). The court found that the applicable federal and state law statutes of limitations required claims to be filed within one or two years of discovery of the alleged misstatement or omission, and within three or five years of sale or violation, respectively. The judge dismissed the federal and state claims for 12 of the MBS certificates as untimely, but preserved federal claims as to eight certificates, determining that the statutes of limitations were tolled on those claims. In addition, the court found that (i) venue was proper because defendant engaged in activity that would constitute the transaction of business in the district for purposes of the applicable venue statute and (ii) plaintiff set forth plausible claims for relief.
Second Circuit Allows FHFA MBS Suits to Proceed
On April 5, the U.S. Court of Appeals for the Second Circuit affirmed a district court’s partial denial of a financial institution’s motion to dismiss on standing and timeliness grounds a suit brought by the FHFA. Fed. Hous. Fin. Agency v. UBS Americas, Inc., No. 12-3207, 2013 WL 1352457 (2d Cir. Apr. 5, 2013) The FHFA brought multiple suits against numerous institutions alleging that the offering documents provided to Fannie Mae and Freddie Mac in connection with the sale of $6.4 billion in residential MBS included materially false statements or omitted material information, resulting in massive losses. The institutions moved to dismiss, contending that (i) the securities claims were time-barred, (ii) FHFA had no standing to pursue the action, and (iii) a negligent misrepresentation claim failed to state a claim upon which relief could be granted. The district court denied the motion to dismiss with respect to the statutory claims and granted it only with respect to the negligent misrepresentation claim. On appeal, the Second Circuit held that the action, filed within three years after the FHFA was appointed conservator of Freddie Mac and Fannie Mae, was timely under the relevant sections of Housing and Economic Recovery Act, and that the FHFA has standing to bring the action. The decision, on interlocutory appeal from the U.S. District Court for the Southern District of New York, holds implications for more than a dozen other similar actions the FHFA has filed.
New York Appellate Division Holds Bond Insurer Can Pursue Repurchase Obligations on Performing Loans
On April 2, the Supreme Court of New York, Appellate Division, held that loans underlying mortgage-backed securities need not be in default to trigger the lender’s repurchase obligations. MBIA Ins. Corp. v. Countrywide Home Loans Inc., No. 602825/2008, 2013 WL 1296525 (N.Y. Sup. Ct. App. Div. Apr. 2, 2013). The trial court granted partial summary judgment in favor of a bond insurer who alleges that a lender (i) fraudulently induced the insurer to insure securitized loans and (ii) breached representations and warranties in the transaction documents. On appeal, the court held that the contract at issue does not require a loan to be in default to trigger the defendant’s repurchase obligation. The court found that the relevant clause requires only that the inaccuracy underlying the repurchase request materially and adversely affect the interest of the insurer. If the insurer can prove that a loan which continues to perform materially and adversely affected its interests, it is entitled to have the lender repurchase the loan. The Appellate Division also (i) affirmed the trial court’s holding that causation is not required under New York insurance law to prevail on a fraud and breach of contract claim, and (ii) determined that the trial court erred in granting summary judgment on the issue of rescissory damages, holding instead that rescission is not warranted in this case.