Financial Industry Review

European Commission Publishes Proposed Legislative Reforms of EU Banks

Editorial Board — Mon, 13 May 2013 19:26:05 +0000

On May 6, the European Commission published a roadmap for legislative changes. This follows the October 2012 publication of the Liikanen report, which provided a set of recommendations on banking reform sponsored by the Commission.

The initiative seeks to address issues in the EU banking sector, including moral hazard, excessive leverage, lack of market discipline and competition distortions. Accordingly, the roadmap lays down a framework for anticipated EU directives covering which banking activities should be separated from each other or be subjected to separation requirements, the nature and extent of the separation and the de minimis exceptions available for smaller banks.

Although the proposals are expected to have a profound effect on the structure of banks, the Commission states that the “vast majority” of EU banks will not be affected by the initiative. Roadmap. Liikanen Report.

Federal Court Dismisses United States Action Against Countrywide In Part

Editorial Board — Mon, 13 May 2013 19:25:09 +0000

On May 8, Judge Jed Rakoff of the United States District Court for the Southern District of New York dismissed claims by the United States for damages and civil penalties under the False Claims Act against Countrywide and Bank of America. The court held that the government could proceed with its claims for violations of the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989. FIRREA permits the government to recover civil penalties for fraudulent activities that “affect” federally insured financial institutions. The government alleged that Countrywide’s mortgage origination business had defrauded Fannie Mae and Freddie Mac. The court noted it would explain its reasoning at a later date. Order. Amended Complaint.

District Court Denies Countrywide’s Motion to Dismiss AIG Suit

Editorial Board — Mon, 13 May 2013 19:24:03 +0000

On May 6, Judge Mariana Pfaelzer of the United States District Court for the Central District of California allowed American International Group, Inc. (AIG) to proceed with several of its claims against Bank of America and related entities arising from AIG’s purchase of Countrywide-issued RMBS. The court held that AIG has standing to bring suit, rejecting the argument that AIG had assigned its claims to the Federal Reserve Bank of New York. Among other causes of action, the court upheld certain claims for fraudulent inducement on the grounds that AIG adequately alleged misstatements regarding loan-to-value ratios, compliance with underwriting guidelines, appraisal values and credit ratings, but dismissed fraud claims as to borrower-provided owner-occupancy data. The court also dismissed AIG’s claims based on alleged oral misrepresentations for failure to specify the speakers, and dismissed AIG’s fraud claims against two underwriters for failure to allege awareness of any misconduct at Countrywide. Order.

New York Appellate Court Reinstates Fraudulent Inducement Claim Against Goldman and M&T Bank

Editorial Board — Mon, 13 May 2013 19:22:58 +0000

On May 7, New York’s First Department appellate court reinstated CIFG Assurance North America, Inc.’s fraud claim against Goldman Sachs & Co. and M&T Bank. Last May, a New York trial court dismissed CIFG’s claim for fraudulent inducement relating to its insurance of RMBS, holding that CIFG was unable to establish reasonable reliance as a matter of law because it had not reviewed a sample of the mortgage loans in its pre-investment due diligence, and dismissed certain breach of contract claims for lack of standing. The First Department held that CIFG had adequately pleaded that it was unaware that defendants’ warranties were false despite having conducted its own limited diligence, and found that questions of fact existed as to whether CIFG’s reliance was reasonable. The court upheld the other aspects of the lower court’s decision, including that CIFG did not have standing to sue for breach of certain transaction documents. Decision.

District Court Denies Banks’ Motions to Dismiss Litigation Concerning Role of MBS Trustees

Editorial Board — Mon, 13 May 2013 19:21:23 +0000

On May 6, Judge Katherine Forrest of the United States District Court for the Southern District of New York denied Bank of America and U.S. Bank’s motions to dismiss an action relating to their roles as trustees of Washington Mutual mortgage-backed securities. Plaintiffs, including the Policemen’s Annuity and Benefit Fund of Chicago and other entities, claimed the trustees failed to notify certificate-holders of breaches of the Pooling and Servicing Agreements relating to the completeness of mortgage files and compliance with loan underwriting guidelines. The court held the Trust Indenture Act plausibly applies to the securities at issue and requires trustees to provide notice of all defaults known to it within ninety days. The court also held that Plaintiffs adequately pleaded that defaults occurred, such as the failure of certain entities to correct flaws in the mortgage files, and that defendants plausibly knew that certain representations in the Pooling and Servicing Agreements had been breached. Judge Forrest noted that Plaintiffs must ultimately prove that the trustees had actual, rather than constructive, knowledge of the alleged breaches and that the existence of even pervasive practices is not necessarily sufficient evidence of actual knowledge. Order.

Assured and UBS Agree to Settle RMBS Litigation for $358 Million

Editorial Board — Mon, 13 May 2013 19:19:53 +0000

On May 6, monoline insurer Assured Guaranty Ltd. announced a $358 million settlement with UBS and its affiliates stemming from losses on residential mortgage-backed securities that were issued, sponsored or underwriten by UBS. Assured sued UBS in 2012 in federal court in New York alleging material misrepresentations and omissions concerning the quality of loans underlying the securitizations at issue that it insured. The settlement terminates all pending RMBS litigation between UBS and Assured. Under the terms of the settlement, the parties will also enter into a collateralized loss-sharing reinsurance agreement whereby UBS will compensate Assured for 85 percent of Assured’s future losses on the securitizations at issue in the litigation. Press Release. SEC Filing.

MBIA and Bank of America Settle MBS Litigation for $1.7 Billion

Editorial Board — Mon, 13 May 2013 19:18:45 +0000

On May 6, monoline insurer MBIA announced that it had reached a $1.7 billion settlement with Bank of America in connection with alleged fraud and breach of contract claims related to Countrywide-issued mortgage-backed securities insured by MBIA. Under the terms of the settlement, Bank of America will make a $1.6 billion cash payment, will transfer back $134 million of MBIA’s securities, and will extend MBIA a $500 million credit line. The settlement ends litigation pending in the Supreme Court for the State of New York since 2008. The agreement also affected other MBIA-issued policies insuring Bank of America’s credit default swaps, and grants Bank of America warrants to purchase approximately 10 million shares of MBIA common stock. The settlement is subject to approval by the New York State Department of Financial Services. Press Release.

Rating Agency Developments

Editorial Board — Mon, 13 May 2013 19:16:28 +0000

On May 9, Fitch released its guidelines for rating tender option bonds. Fitch Report.

On May 9, Moody’s released its methodology for rating CLOs. Moody’s Report.

On May 8, Fitch released its surveillance criteria for franchise loan ABS. Fitch Report.

On May 7, S&P released its criteria for multiple-use special-purpose entities. S&P Report.

On May 7, S&P released its criteria for assessing guarantees in structured finance transactions. S&P Report.

On May 7, S&P released its criteria for asset isolation and special-purpose entities in structured finance transactions. S&P Report.

On May 7, Moody’s released its methodology for rating consumer loan ABS transactions. Moody’s Report.

On May 7, Moody’s released its guidelines for incorporating sovereign risk into (i) rating CDOs of SMEs in Europe; (ii) rating multi-pool financial lease-backed transactions in Italy; and (iii) rating EMEA auto loans. Moody’s Report (SME CDO). Moody’s Report (Italy). Moody’s Report (EMEA Auto Loans).

Note: Free registration is required for rating agency releases and reports.

FHFA Limit on Fannie and Freddie Loan Purchases to Qualified Mortgages

Editorial Board — Mon, 13 May 2013 19:12:04 +0000

On May 6, the FHFA announced that it is directing Fannie Mae and Freddie Mac to limit future mortgage acquisitions to loans that fall under the requirements for a qualified mortgage. Starting on January 10, 2014, Fannie and Freddie will no longer be able to purchase a mortgage loan that is subject to the “ability to repay” requirements under the Dodd-Frank Act if the loan: (i) is not fully amortizing; (ii) has a term of longer than 30 years; or (iii) includes points and fees in excess of 3% of the total loan amount (or such other limits for low balance loans as set forth in the rule). FHFA Release. Fannie Mae Letter. Freddie Mac Letter.

FCA Urges Firms to Update Status Disclosures to Reflect Creation of the FCA and PRA

Editorial Board — Tue, 07 May 2013 21:08:02 +0000

On May 1, the FCA published a press release stating that it expects firms to review their regulatory status disclosures as a priority and ensure that they are up to date and accurate following the creation of the FCA and PRA and the renaming of the public Financial Services register. The FCA has stated that it recognises that there are exceptional circumstances where it may not have been possible to make all the required disclosure updates immediately upon the relevant change. However, the FSA, except for where transitional provisions are available, requires firms to be able to demonstrate that they intend to make the necessary updates at the earliest opportunity.