On January 29, Morgan Stanley and the Federal Deposit Insurance Corporation agreed to settle five suits encompassing state and federal claims alleging that Morgan Stanley made misrepresentations in offering residential mortgage-backed securities to three now-defunct banks. Morgan Stanley will pay $63 million to the FDIC, as receiver for Colonial Bank of Montgomery, Alabama, Security Savings Bank of Henderson, New York, and United Western Bank of Denver, Colorado. Morgan Stanley denied all liability regarding the claims, and the settlement agreement specified that the parties settled in order to avoid further litigation. The settlement was reached in coordination with the Department of Justice. Settlement and Release Agreement.
Federal Deposit Insurance Corporation
FDIC Sues BNY Mellon For Alleged Failure As Trustee of RMBS
On August 19, 2015, the Federal Deposit Insurance Corp., acting as receiver for Guaranty Bank, filed suit against Bank of New York Mellon Corp. in New York federal court, alleging that BNY breached its duties as trustee of 12 RMBS trusts that issued approximately $2 billion in certificates. The trusts were sponsored by Countrywide Home Loans and EMC Mortgage Corp. The FDIC alleges that BNY breached its contractual obligations by failing to provide notice of representation and warranty violations and demand Countrywide and EMC to replace or buy back the noncompliant loans, provided false regulatory certifications and remittance reports, and failed to take possession of complete mortgage files. The FDIC asserts claims for breach of contract, the federal Trust Indenture Act, and the New York Streit Act. Complaint.
FDIC, Federal Reserve and Office of Comptroller of the Currency Issue Host State Loan-to-Deposit Ratios
On June 29, the Federal Deposit Insurance Corporation, Board of Governors of the Federal Reserve System and Office of the Comptroller of the Currency issued the host state loan-to-deposit ratios that they will use to determine compliance with section 109 of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. Joint Release.
FDIC, Federal Reserve and Office of Comptroller of the Currency Reiterate Annual Public Disclosure Requirements for Medium-Sized Financial Companies Under Dodd-Frank Company-Run Stress Tests
On June 2, the Federal Deposit Insurance Corporation, Board of Governors of the Federal Reserve System and Office of the Comptroller of the Currency reiterated the disclosure requirements for annual stress tests conducted by financial institutions with total consolidated assets between $10 billion and $50 billion pursuant to the Dodd-Frank Act. The medium-sized firms are required to disclose certain information, including: a description of the types of risks included in the stress test; a summary description of the methodologies used in the stress test; estimates of losses, revenue, and net income; post-stress capital ratios; and an explanation of the most significant causes for the changes in regulatory capital ratios. Joint Release.
New FAQ’s Regarding the Scope and Implementation of the Volcker Rule Issued by the U.S. Banking, Securities and Commodities Regulatory Agencies
On February 27, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission and the Commodity Futures Trading Commission issued a new set of frequently asked questions and responses regarding the scope and implementation of Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, commonly referred to as the “Volcker Rule.” Among the issues addressed are:
- Loan Securitization Servicing Assets: Are the “rights or other assets” described in § 44.10(c)(8)(i)(B) of the Volcker Rule (“servicing assets”) limited to “permitted securities,” or can other assets be servicing assets for purposes of the loan securitization exclusion?
- Mortgage-Backed Securities of Government-Sponsored Enterprise: How are certain mortgage-backed securities issuers sponsored by government-sponsored enterprises treated under the final rule’s covered funds provisions?
- Covered Fund Exemption; Marketing Restriction on Foreign Banking Organization: The Volcker Rule provides an exemption for certain covered fund activities conducted by foreign banking entities (known as the “SOTUS Covered Fund Exemption”) provided that, among other conditions, “no ownership interest in such hedge fund or private equity fund is offered for sale or sold to a resident of the United States” (the “marketing restriction”). Does the marketing restriction apply only to the activities of a foreign banking entity that is seeking to rely on the SOTUS covered fund exemption or does it apply more generally to the activities of any person offering for sale or selling ownership interests in the covered fund?
- Conformance Period: How do the requirements of the Volcker Rule apply to a banking entity during the conformance period? For instance, must a banking entity deduct its investment in a covered fund from its tier 1 capital prior to the end of the conformance period?
- Foreign Public Fund Seeding Vehicles: The Volcker Rule excludes from the definition of covered fund a registered investment company and business development company, including an entity that is formed and operated pursuant to a written plan to become one of these entities. Would an entity that is formed and operated pursuant to a written plan to become a foreign public fund receive the same treatment?
Link to the website of the Office of the Comptroller of the Currency that sets forth the FAQ’s.
Regulators Release Guidance on Private Student Loans With Graduated Repayment Terms at Origination
On January 29, the federal financial regulatory agencies (the Board of Governors of the Federal Reserve System, the Consumer Financial Protection Bureau, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Office of the Comptroller of the Currency), in partnership with the State Liaison Committee (SLC) of the Federal Financial Institutions Examination Council, issued guidance for financial institutions on private student loans with graduated repayment terms at origination.
This guidance provides principles that financial institutions should consider in their policies and procedures for originating private student loans with graduated repayment terms which are structured to provide for lower initial monthly payments that gradually increase. The Agencies issued this guidance because they recognize that the competitive job market, traditionally low entry-level salaries, and higher student debt loads can contribute to some borrowers preferring greater flexibility with their payments as they transition into the labor market. Press Release. Published Guidance.
Federal Court Dismisses $31 Million FDIC Suit as Time-Barred
On April 22, Judge Mariana R. Pfaelzer of the United States District Court for the Central District of California dismissed as time-barred the Federal Deposit Insurance Corporation’s (FDIC) $31 million suit against JPMorgan Chase & Co., Bank of America, Citigroup and Deutsche Bank AG related to the sale of RMBS originated by Countrywide. FDIC sued as receiver for Strategic Capital Bank. Judge Pfaelzer held that a reasonable investor in Countrywide securities could have sued before May 22, 2008, and therefore a reasonably diligent investor should have discovered alleged misstatements in the offering documents before that date. The Court held that the statute of limitations for later-filed federal claims was not tolled by an earlier action because it was filed in state court, and the plaintiff had not purchased any of the same tranches as Strategic Capital Bank. Decision.
Federal Court Narrows FDIC Lawsuit Against Countrywide
On January 3, Judge Mariana R. Pfaelzer of the Central District of California ruled on motions to dismiss filed by defendants Countrywide, Bank of America, and UBS in an action brought against them by the Federal Deposit Insurance Corp. (FDIC) concerning $108.4 million in residential mortgage-backed securities. The Court’s order concerned the FDIC’s claims under Section 11-51-501(1)(b) of the Colorado Securities Act. The Court granted the motions with respect to alleged misstatements pertaining to owner-occupancy data and additional liens because the Offering Documents indicated that this data was self-reported by borrowers. It also granted the motion with respect to successor liability claims asserted against Bank of America. The Court denied the motions with respect to alleged misstatements pertaining to loan underwriting standards and appraisals. The Court also denied the motions with respect to defendants’ argument that the FDIC did not adequately allege reliance and causation, holding that those are not elements of the FDIC’s claim and thus not required to be pled. Opinion.
Credit Risk Retention – Joint Regulatory Proposed Rules
On March 28, 2011, the Office of the Comptroller of Currency, the Federal Deposit Insurance Corporation, the Board of Governors of the Federal Reserve System, the Securities and Exchange Commission, the Department of Housing and Urban Development and the Federal Housing Finance Agency released a joint notice of proposed rulemaking to implement the credit risk retention requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The paper linked below provides an in-depth examination of the proposed rules and their implications for financial markets. Click here to read more.