FINRA Fines Deutsche Bank Securities $7.5M For Negligent Misrepresentations

Posted by Orb Staff on July 22, 2010 No Comments
Categories : Residential Mortgage

ink=http://www.finra.org/Newsroom/NewsReleases/2010/P121747]Financial Industry Regulatory Authority[/link] (FINRA) has fined Deutsche Bank Securities Inc. $7.5 million for negligently misrepresenting delinquency data in connection with the issuance of subprime securities. FINRA found that Deutsche Bank Securities negligently misrepresented and underreported the percentages of mortgages that were delinquent in the prospectus supplements of six subprime residential mortgage-backed securities (MBS) issued in 2006. The firm also failed to correct errors by a third-party vendor and servicers, which underreported the historical delinquency rates of the mortgages in connection with its offer and sale of 16 additional subprime MBS issued in 2007, FINRA says. The regulator also alleges that Deutsche Bank Securities failed to establish a system to supervise its reporting of required historical delinquency information. ‘Delinquency rates constitute material information for investors,’ says James S. Shorris, FINRA's executive vice president and acting chief of enforcement. ‘Deutsche Bank Securities' failure to ensure that the delinquency information was accurate is an unacceptable failure to meet this important obligation." During 2006 and 2007, Deutsche Bank Securities underwrote subprime MBS and sold them to institutional investors. FINRA found that in the prospectus supplements of six subprime securitizations worth approximately $2.2 billion offered in March 2006, the firm described a method of calculating delinquencies that was different from the method it actually used and, as a result, delinquencies were underreported. In one MBS deal, Deutsche Bank Securities reported that under its described method of calculation, 8.75% of the loans were between 30 and 59 days delinquent, corresponding to $14 million in delinquent loans. But the actual delinquency numbers computed under the method Deutsche Bank Securities disclosed were significantly higher, with 24.02% of the loans between 30 and 59 days delinquent, corresponding to $38.5 million in delinquent loans, FINRA claims. FINRA also found that Deutsche Bank Securities negligently underreported historical delinquency rates on a website the firm maintained that was referenced in prospectus materials in connection with the sale of 16 MBS. Issuers of subprime MBS are required to disclose historical performance information for prior securitizations that contain similar mortgage loans as collateral. That information, which includes historical delinquency rates, is called "static pool" information, and it is one of the disclosure requirements for asset-backed securities under Regulation AB. After Regulation AB became effective in December 2005, Deutsche Bank Securities prospectus supplements for new subprime MBS offerings informed investors they could view static-pool information on the firm's Regulation AB website. In January 2007, Deutsche Bank Securities learned that the outside vendor it retained to populate its Regulation AB website was underreporting delinquencies as a result of errors made by the servicers responsible for tracking delinquencies, FINRA says. Deutsche Bank Securities was able to determine that these errors affected 16 securitizations and was able to provide corrected delinquency data for 13 of them to the vendor to use going forward. The vendor failed to use the corrected data, and Deutsche Bank Securities never ensured that the vendor posted the corrected static-pool information, FINRA says, adding that the firm continued to refer investors to the inaccurate information about these 13 securitizations on the Regulation AB website. In settling this matter, Deutsche Bank Securities neither admitted nor denied the charges, but consented to the entry of FINRA's findings. SOURCE: [link=http://www.finra.org/Newsroom/NewsReleases/2010/P121747]FINRA

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