Second Circuit Upholds Dismissal of RMBS Lawsuit as Time-Barred

On November 16, the Second Circuit Court of Appeals affirmed the District Court’s dismissal of a lawsuit brought by Deutsche Bank National Trust Co. (acting as Trustee for RMBS Trust GSR 2007-OA1) against Quicken Loans, alleging that Quicken breached its obligation to repurchase mortgage loans that violated representations and warranties (“R&Ws”).  The court held that because Quicken’s R&Ws only purported to guarantee characteristics of the loans at the time of sale, New York’s six year statute of limitations for breach of contract ran from that date, and had lapsed by the filing date of the action.

Following the New York Court of Appeals’ decision in ACE, the court rejected the Trustee’s argument that the accrual date for its claim was delayed by the repurchase procedures set forth in the transaction documents. The court also rejected the Trustee’s argument that it should be entitled to take advantage of a statutory extension to the applicable limitations period because the FHFA originally filed the lawsuit. It held that FHFA did not “bring” the claims at issue because it only filed the initial summons and notice in the case before abandoning prosecution of the action after realizing it was not the proper plaintiff. Finally, the court upheld the dismissal of the Trustee’s breach of the implied covenant of good faith and fair dealing as duplicative of the breach of contract claim.  Order.

Case Update: Madden v. Midland Funding

As expected, today, November 10, 2015, Midland Funding filed a petition for a writ of certiorari in the United States Supreme Court, asking the Court to review the Second Circuit’s ruling in Madden v. Midland Funding, that the federal preemption provision of the National Bank Act, 12 U.S.C. § 85, could not be invoked by a non-national bank assignee.  A link to the petition is provided here.  The cert petition advances two primary arguments as to why the Supreme Court should grant review.  First, Midland claims the need for resolution of a split between the Second Circuit, on the one hand, and the Eighth and Fifth Circuits, on the other, concerning the impact of the National Bank Act on assigned loans.  Specifically, Petitioner claims the Madden decision – subjecting non-national bank assignees to state usury laws – conflicts with the Eighth Circuit’s decision in Krispin v. May Department Stores Co., 218 F.3d 919 (8th Cir. 2000), which holds that the preemption inquiry turns on the status of the originating entity and subsequent assignments are irrelevant, and the Fifth Circuit’s decision in FDIC v. Lattimore Land Corp., 656 F.2d 139 (5th Cir. 1981), which also looked to the originator of the debt (albeit in the inverse scenario, where the originator was the non-national bank).

Second, the Petitioner claims the Madden case presents a question of substantial importance, particularly to the financial community.  Midland contends that if left intact, the Second Circuit’s decision will allow states to regulate lending terms when a loan created by a national bank is assigned to a non-national bank entity.  Going one step further, Midland asserts the Second Circuit’s reasoning is all the more troubling because it is equally applicable to loans originated by savings associations and state-chartered federally insured banks.  In turn, Midland contends the decision has serious implications for the secondary markets, as it could render loans originated by national banks and subsequently transferred worthless.  See Pet. 23 n.8 (“the Second Circuit’s decision casts doubt on the viability of online lending marketplaces currently envisioned by the federal government…. The decision “pose[s] an acute risk” to lenders in those marketplaces, because they may be subject to state usury laws based on the vagaries of a particular customer’s location.”).  Ultimately, Midland claims the perilous state of the financial markets in the wake of the Madden decision and the need for uniform lending practices demand immediate Supreme Court intervention.

As previously explained, with anticipated extensions, we do not expect to hear if the Supreme Court is going to take the case until at least February 22, 2016.  Petition.

EIOPA Consultation Paper

On October 30, 2015 the European Insurance and Occupational Pensions Authority (EIOPA) published a consultation paper on the proposal for preparatory guidelines on product oversight and governance arrangements by insurance undertakings and insurance distributors.

The guidelines will be addressed to competent authorities and will provide support and guidance on how to proceed in the preparatory period leading up to the transposition of the Insurance Distribution Director (IDD).

The paper invites consultation responses – responses must be received by January 29, 2016.

EU Council Information Note on SFT Regulation

Following the first reading of the proposed Regulation on reporting and transparency of securities financing transactions (SFT Regulation) in the European Parliament, the Council of the EU has published a note setting out the proposals.

The Council’s note explains what the policy makers aim to achieve through the new regulation and also sets out the outcomes of the Parliament’s first reading, including discussion of proposed amendments to the regulation.

EBA Announces Details of 2016 EU-Wide Stress Test

The European Banking Authority (EBA) published on November 5, 2015 its EU-wide stress test and draft methodology for discussion. The stress-test exercise to be carried out in 2016 will assess a sample of banks covering broadly 70% of the banking sector in the EU against a common macroeconomic baseline and adverse scenario. The objective will be to provide supervisors, banks and other market participants with a common analytical framework to compare and assess the resilience of the EU banking system to shocks.

Details of the stress test are set out in a press release published by the EBA, and the draft methodology note is also available for review.

BCBS Consultation Document on Haircut Floors

The Basel Committee on Banking Supervision (BCBS) has published a consultation document on haircut floors for non-centrally cleared securities financing transactions.

The report is published following a recommendation by the Financial Stability Board that the BCBS incorporate the haircut floors into capital requirements for non-centrally cleared SFTs by setting significantly higher capital requirements for transactions traded below the haircut floors.

The document welcomes consultation responses, and specifically asks whether the public sees any weakness in the proposals or any specific implementation challenges. Responses must be received by January 5, 2016.

CFTC Extends Time-Limited No-Action Relief for Swap Execution Facilities from Certain “Block Trade” Requirements

On November 2nd, the U.S. Commodity Futures Trading Commission (“CFTC”) extended no-action relief to Swap Execution Facilities (“SEFs”)  from the “occurs away” requirement in the definition of “block trade” under CFTC regulation Section 43.2. The definition of “block trade” includes publicly reportable swap transactions that occur, “away from the registered [SEF’s] or [Designated Contract Market’s] trading system or platform and is executed pursuant to the registered [SEF’s] or [Designated Contract Market’s] rules and procedures”. CFTC Letter 15-60 extends no-action relief from the “occurs away” requirement through November 15, 2016Press ReleaseCFTC Letter 15-60.

Federal Reserve Announces Approval of Fee Schedules for Payment Services Provided to Depository Institutions

On November 3rd, the Federal Reserve Board announced the approval of fee schedules for payment services the Federal Reserve Banks provide to depository institutions, effective January 1, 2016. The Federal Reserve Banks estimate the following increases: Check prices will increase an average of 0.5%, FedACH prices will increase an average of 6.5%, Fedwire Funds prices will increase an average of 5.8%, and FedLine prices will increase an average of 1.5%.  Press Release.

Rating Agency Developments

On November 2nd, DBRS updated its rating methodology for Companies in the Gaming IndustryMethodology.

On November 2nd, DBRS updated its rating methodology for European Non-Performing Loans SecuritizationsMethodology.

On October 30th, Moody’s updated its rating methodology for Large Loan/Single Asset-Single Borrower CMBSMethodology.

On October 30th, Moody’s updated its rating methodology for SME Balance Sheet SecuritizationsMethodology.

On October 30th, Moody’s updated its rating methodology for Finance CompaniesMethodology.

On October 29th, DBRS published its rating methodology for U.S. Collateralized Fund Obligations Backed by Private EquityMethodology.

U.S. Supreme Court Denies S&P Investors’ Petition for Certiorari

On November 2, 2015, the United States Supreme Court denied investors’ petition for review of a Second Circuit decision affirming the dismissal of their class action against Standard & Poor’s Rating Services’ parent, McGraw-Hill Cos. Inc., and two of its corporate officers.  In that case, the plaintiff pension fund had made claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Section 15 of the Securities Act of 1933, alleging that S&P’s Ratings Services had intentionally made false and misleading statements to investors about the accuracy of its credit ratings for mortgage-backed securities.  As we previously covered, the Second Circuit had affirmed a decision by Judge Sidney H. Stein of the Southern District of New York dismissing the suit and holding that S&P’s ratings were “mere commercial puffery” and could not form the basis for a securities fraud claim.  In its certiorari request, Plaintiff argued that Judge Stein’s and the Second Circuit’s broad interpretation of “puffery” conflicted with Supreme Court precedent, Omnicare Inc. et al. v. Laborers District Council Construction Industry Pension Fund by holding that the alleged knowing falsity of S&P’s statements is irrelevant.  Petition for CertOrder List.