Due Diligence Firm Subpoenaed By DOJ Over RMBS Deals

Posted by Patrick Barnard on September 03, 2013 No Comments
Categories : Residential Mortgage

In the years that led up to the financial crisis, Clayton Holdings was a ‘major provider of third-party due diligence services’ to Wall Street firms that packaged mortgages into bonds for sale to investors, according to a 2011 report from the Financial Crisis Inquiry Commission.

As such, the Shelton, Conn.-based firm reportedly holds important documentation relating to residential mortgage-backed securities deals (RMBS) with the major U.S. banks, including Bank of America, prior to the mortgage meltdown of 2008.

As per a Bloomberg News report, the U.S. Department of Justice (DOJ), as part of its investigation into bank actions leading up to the financial crisis, has subpoenaed due diligence reports, internal communications related to reviews of pools of loans, correspondence with clients and other documents from Clayton Holdings.

The action was brought by the DOJ's Residential Mortgage Backed Securities Working Group, which was established last year by President Barack Obama to lead an overall investigation into pre-financial crisis deals.

It's not the first time the DOJ has sought such documentation from Clayton Holdings, according to the report. As of last week, the firm had so far declined to comply with the subpoena.

‘These documents are crucial to the United States' investigation as to which residential mortgage-backed securities, and which businesses involved with their assembly, could give rise to’ civil claims, the Justice Department says in its filing.

The subpoena was issued as part of a ‘broad and ongoing nationwide investigation into the assembly, underwriting and issuance of residential mortgage-backed securities during the time period between 2005 and 2007,’ the DOJ said in its filing.

Last month, the Securities and Exchange Commission (SEC) filed a lawsuit against Bank of America and two of its subsidiaries for allegedly defrauding investors in a major pre-crisis RMBS deal by failing to disclose key risks and misrepresenting facts about the underlying mortgages.

Specifically, the SEC alleges that Bank of America failed to tell investors that more than 70% of the mortgages backing the offering – called BOAMS 2008-A – originated through the bank's ‘wholesale’ channel of mortgage brokers unaffiliated with Bank of America entities. What's more, these loans represented ‘vastly greater risks of severe delinquencies, early defaults, underwriting defects and prepayment’ than the bank indicated at the time, the SEC alleges.

‘In its own words, Bank of America 'shifted the risk' of loss from its own books to unsuspecting investors, and then ignored its responsibility to make a full and accurate disclosure to all investors equally,’ said George S. Canellos, co-director of the SEC's division of enforcement, in a statement. ‘This is one in a long line of RMBS-related enforcement actions brought by the SEC to hold entities accountable for wrongdoing connected to the financial crisis.’

The DOJ has also launched a parallel civil action against Bank of America for violations of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989. That lawsuit is in connection with RMBS deals totaling more than $850 million.

For more, check out the Bloomberg News report.

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