On January 18, the FDIC approved an interim final rule clarifying how it will treat certain creditor claims under the new orderly liquidation authority established under the Dodd-Frank Act. This interim final rule differs from the related Notice of Proposed Rulemaking by clarifying the standard for collateral valuations and the treatment of contingent claims. FDIC Release. FDIC Rule.
Month: January 2011
FSOC Risk Retention Study
On January 18, the Financial Stability Oversight Council released a study on the macroeconomic effects of the risk retention requirements under the Dodd-Frank Act. The study examines how risk retention can help reform the securitization market, protect the public against irresponsible lending practices, and facilitate economic growth by allowing for safe and stable credit formation for consumers, businesses, and home owners. Treasury Release. FSOC Study.
FSOC Volcker Rule Study
On January 18, the Financial Stability Oversight Council issued a study required by the Dodd-Frank Act entitled, “Study & Recommendations on Prohibitions on Proprietary Trading & Certain Relationships with Hedge Funds & Private Equity Funds”. The study recommends, among other things, that rulemaking agencies consider providing exceptions for certain funds that are within the Volcker Rule’s broad definition of “hedge fund” and “private equity fund”. FSOC Study.
FHFA Initiative on Servicer Compensation
On January 18, the FHFA announced a joint initiative to consider alternatives for future mortgage servicing structures and servicing compensation for single-family mortgage loans. The goals of this initiative are to improve service for borrowers, reduce financial risk to servicers, and provide flexibility for guarantors to better manage non-performing loans, while promoting continued liquidity in the “To Be Announced” mortgage securities market. FHFA Release.
Borrower Files Class Action Against EMC Mortgage Over Loan Modification Practices
On January 10, 2011, a putative class action was filed in the U.S. District Court for the Eastern District of Washington against loan servicer EMC Mortgage Corp. and its parent, Bear Stearns. The action is asserted on behalf of all EMC-serviced mortgagors in the State of Washington who have made payments pursuant to a temporary loan modification plan or repayment agreement while attempting to obtain a permanent loan modification (alleged to number in the “hundreds if not thousands”). It alleges that EMC has acted in bad faith, and engaged in improper accounting, bad recordkeeping, and misrepresentations during loan modification negotiations with mortgagors in the State of Washington. Specifically, the putative class representative alleges that, despite EMC’s repeated promises to modify her and other mortgagors’ loans and their compliance with the modification terms, EMC is improperly delaying permanent modification of the loans while at the same time charging excessive fees, inflating arrearages and continuing to threaten foreclosure. The Complaint alleges violations of the Washington Consumer Protection Act and EMC’s settlement with the Federal Trade Commission, along with claims for breach of contract, breach of the duty of good faith and fair dealing, promissory estoppel, and unjust enrichment. Complaint.
ACA Files Abacus Suit Against Goldman Sachs in New York State Court
ACA Financial Guaranty Corp. filed suit on January 6, 2011 against Goldman Sachs, alleging fraud and unjust enrichment in connection with the Abacus 2007-AC1 collateralized debt obligation. ACA alleges Goldman designed the securitization to benefit Paulson & Co., who shorted the portfolio, and deceived ACA into believing that Paulson & Co. was an equity investor in the portfolio. ACA insured senior tranches and also invested in the Abacus notes. Complaint.
Schwab Pays $119 Million to Settle with SEC Regarding MBS Investments
On January 12, 2011, Charles Schwab Corp. announced a settlement with the SEC related to claims that it misled investors in connection with a mutual fund heavily invested in private mortgage-backed securities. The SEC’s claims included that the mutual fund, YieldPlus, was improperly marketed as low risk, and that the fund violated its own investment concentration rules. The case will proceed against the named individual defendants, who were not part of the settlement. SEC Press Release.
Massachusetts Supreme Court Rules Against MBS Trustees in Quiet Title Actions
On January 7, 2011, the Massachusetts Supreme Judicial Court ruled against two trustees of MBS securitizations in actions to quiet title to foreclosed properties. The court found the two residential foreclosures at issue invalid because the trustees could not prove assignment of the mortgages to them prior to the foreclosure sales. Though the court held that valid assignment could be accomplished and proved through securitization agreements, it held that these particular plaintiffs had failed to produce sufficient documentation with enough detail to establish the full chain of assignment for these particular mortgages prior to the foreclosure sales. In a concurring opinion, two Justices criticized the “utter carelessness with which the plaintiff banks documented the titles to their assets.” Decision.
State of Connecticut’s Action Against Ratings Agencies Remanded to State Court
On January 5, 2011, Federal District Court Judge Janet Bond Arterton of the District of Connecticut granted the State of Connecticut’s motion to remand its case back to state court. Defendants (Moody’s, McGraw Hill Co., and Standard & Poor’s) argued that the State was suing to benefit specific citizens, thus creating federal diversity jurisdiction. Judge Arterton concluded that the case, brought under the Connecticut Unfair Trade Practices Act, related to the State’s articulated interest in protecting all of its citizens from unfair practices, unique from the interests of individual investors, and therefore the State is a citizen of no state for diversity jurisdiction purposes. The court also found that the Class Action Fairness Act did not apply. Decision.
Rating Agency Developments
On January 11, S&P updated its methodology and assumptions for rating and monitoring U.S. auto loan ABS. S&P Release.
On January 11, Fitch published an updated report on ‘Guidelines for Rating Prerefunded Municipal Bonds‘. Fitch Release. Fitch Report.
On January 12, Fitch revised its Ratings Definitions to remove the term “Shadow Ratings” and to add an “RD”, Restricted Default, definition to National scale short- and long-term Issuer Default Ratings. Fitch Release.