Orrick's Financial Industry Week in Review


Financial Industry Developments

FHFA Requests Comments on Private Mortgage Insurer Eligibility Requirements for Fannie Mae and Freddie Mac Counterparties

On July 10, FHFA requested comments on draft requirements that would apply to private mortgage insurance companies that insure mortgage loans owned or guaranteed by Fannie Mae and Freddie Mac.  These requirements would apply only to private mortgage insurers currently approved to do business with Fannie Mae or Freddie Mac and those seeking approval in the future.  The updated financial requirements incorporate a new, risk-based framework that seeks to ensure that approved insurers have a sufficient level of liquid assets to pay claims.  The draft requirements include enhanced performance expectations and define remedial actions that would apply should an approved insurer fail to complyReleaseDraft OverviewWhite Paper.    

OCC Raises Assessments for National Banks and Federal Savings Associations with Assets Over US$40 Billion

On July 9, the OCC published a final rule that raises assessments on national banks and federal savings associations (FSAs) with total assets more than US$40 billion. Under the final rule, the marginal assessment rate will increase by 14.5 percent beginning September 30, 2014. The rule will become effective on August 8, 2014ReleaseFinal Rule.   

CFPB Issues Mortgage Lending Rules Related to Treatment of Surviving Family Members

On July 8, CFPB issued a rule that when a borrower dies, the name of the borrower's heir generally may be added to the mortgage without triggering Ability-to-Repay rule because an heir has already acquired the title to the home.  ReleaseInterpretive Rule. 

Fed Reports on IFR and the Payment Agreement

On July 7, the Fed published a report regarding the Independent Foreclosure Review (IFR) and the Payment Agreement that replaced the IFR. The Payment Agreement required large mortgage servicers to provide approximately US$10 billion to eligible borrowers in cash and other foreclosure prevention assistance.  The report provides information on the process for the review of the foreclosure files during the IFR and file review results, including servicer error rates during the IFR.  The report also contains updated information on direct borrower payments and other assistance.  The Fed also released action plans for Goldman Sachs and Morgan Stanley to correct deficiencies in the firms' third-party vendor management proceduresReleaseIndependent Foreclosure Report.   

FATCA Goes Into Effect

On July 1, the Foreign Account Tax Compliance Act became effective. FATCA was enacted to target noncompliance by U.S. citizens of tax obligations using foreign accounts.  FATCA seeks to obtain information on accounts held by U.S. taxpayers in other countries.  More than 100 jurisdictions either permit their financial institutions to enter into agreements with the IRS, or they enter into one of the two Model Intergovernmental Agreements with the United States and ensure their financial institutions' information is reported to the IRS.  Financial institutions that refuse to comply are subject to severe penalties.  ReleaseFATCA Page.   

Agencies Issue Host State Loan-to-Deposit Ratios

On July 2, four financial regulators (OCC, the Fed, FDIC) issued the host state loan-to-deposit ratios used to determine compliance with Section 109 of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. Section 109 prohibits a bank or a bank holding company from establishing or acquiring a branch outside their home state operating primarily to produce deposits.  To test compliance, regulators compare each bank's statewide loan-to-deposit ratio to the host state loan-to-deposit ratio for banks in a particular state.  If a bank's statewide loan-to-deposit ratio is less than one-half of the published ratio for that state or if data are not available, the appropriate agency will assess whether the bank is reasonably helping to meet the credit needs of the communities served by the bank's interstate branches.  Release.  Ratios.   

List of Distressed or Underserved Nonmetropolitan Middle-Income Geographies Released

On June 30, the Fed, FDIC and OCC released a 2014 list of distressed or underserved nonmetropolitan middle-income geographies, where revitalization or stabilization activities will receive Community Reinvestment Act consideration as "community development."  ReleaseList.   

Agencies Provide Guidance for Home Equity Lines of Credit Nearing End-of-Draw Periods

On June 30, four financial regulators (OCC, the Fed, FDIC, NCUA) and the Conference of State Bank Supervisors (CSBS) issued guidance regarding home equity lines of credit (HELOCs) nearing their "end-of-draw" periods, which occur when the principal amount of the HELOC must begin to be repaid.  The guidance encourages financial institutions to effectively communicate with borrowers about the pending reset and provides principles for managing risk as HELOCs reach their end-of-draw periods.  Some borrowers may find it difficult to make higher payments or to refinance existing loans, and the guidance describes how financial institutions can effectively manage their potential exposure.  ReleaseGuidance.    

Rating Agency Developments

On July 10, Fitch restated its criteria for assessing prepaid energy transactionsReport.

On July 10, Fitch revised its criteria for assessing U.S. tobacco settlement ABSReport.

On July 4, Moody's outlined its approach to assessing set-off risk for Australian securitization and covered bondsReport.

On July 2, S&P revised its assumptions for rating U.S. RMBSAssumptionsAppendixes.

On July 1, Fitch revised its master criteria for assessing U.S. RMBSReport.

On June 30, Moody's outlined its approach to rating companies in the global gaming industryReport.

Note: Free registration is required for rating agency releases and reports.
Distressed Debt and Restructuring Developments

Orrick Alert: Summary of Puerto Rico Public Corporation Debt Enforcement & Recovery Act

On June 28, the Commonwealth of Puerto Rico adopted the Puerto Rico Corporations Debt Enforcement & Recovery Act, Act 71-2014, enabling certain Commonwealth public corporations in financial distress to restructure their debt obligations. The Debt Enforcement Act establishes a debt enforcement, recovery and restructuring regime for public corporations and other instrumentalities of the Commonwealth during an economic emergency.  Please click here for Orrick's complete summary.  

Investment Management

FFIEC Launches Cybersecurity Website

On June 24, the Federal Financial Institutions Examination Council announced that it has launched a Cybersecurity Web page to promote awareness of Cybersecurity activities.  The Web page is a central repository for current and future FFIEC-related materials on cybersecurity and provides links to joint statements, webinars and other information that may help financial institutions when thinking about the issue of cybersecurity.  Website.   

SEC Division of Investment Management Issues Guidance

The SEC's Division of Investment Management has issued a guidance update regarding "Private Funds and the Application of the Custody Rule to Special Purpose Vehicles and Escrows" in order to address inquiries received and issues identified by the SEC's Office of Compliance Inspections and Examinations, regarding how the custody rule under the Investment Advisers Act of 1940 applies when advisers to pooled investment vehicles, particularly private equity funds, utilize:  (1) special purpose vehicles when making investments and (2) escrow accounts when selling interests in portfolio companies.  Guidance

RMBS and Other Securities Litigation

New York's Highest Court Will Review First Department Decision on RMBS Putback Statute of Limitations

On June 27, the Court of Appeals for the State of New York agreed to review the First Department's December 2013 decision in ACE v. DB Structured Products.  In that decision, the First Department held that the Trustee's putback claims were untimely and that the certificate holder-plaintiffs who initially had brought the claims lacked standing to sue.  Order.    

Wisconsin Court Dismisses Claims Against Three Banks as Time-Barred

On July 2, Judge William M. Conley of the United Stated District Court for the Western District of Wisconsin dismissed suits brought by CUNA Mutual Group affiliates (CUNA)   against UBS Securities and Banc of America Securities LLC as time-barred under Wisconsin's six-year statute of limitations for breach of contract claims. CUNA sought to rescind its purchase of RMBS from the banks, claiming intentional misrepresentations led to poor performance.  CUNA also claimed mistake and unjust enrichment, arguing that that its purchase of the securities was based on the mistaken belief that the underlying collateral was properly underwritten.  Because CUNA had brought its claims more than six years from its purchase of the securities at issue, the court held its claims were untimely.  Judge Conley also dismissed in part CUNA's parallel suit against J.P. Morgan Securities as time barred under Wisconsin's six year statute of limitations.  J.P. Morgan did not move to dismiss CUNA's claims for mistake and unjust enrichment, and the Court ordered additional briefing.  Banc of America Order.  UBS OrderJ.P. Morgan Order.   

Bank of New York Mellon Sued Over Missing Loan Documents

On June 27, a group of thirteen institutional investors in RMBS trusts filed a complaint against trustee Bank of New York Mellon in the Supreme Court for the State of New York.  The investors claim that BNY Mellon failed to obtain and maintain critical loan file documents (such as promissory notes, mortgages, and assignments) demonstrating that title to the mortgage loans was held by the trusts.  The investors assert they have incurred damages in the form of increased costs to the Trust, reduced borrower payments, and increased losses on distressed properties.  The complaint asserts claims for breach of contract, breach of fiduciary duty, negligence, and an accounting.  Complaint.   

NY Court Dismisses Repurchase Suit Against Nomura In Part

On June 26, 2014,  Justice Friedman of the Supreme Court of the State of New York partially granted Nomura Credit & Capital Inc.'s (Nomura) motion to dismiss a repurchase suit brought by Nomura Asset Corporation Alternative Loan Trust, Series 2006-S4 (the Trust). The Trust alleged breach of contract in connection with the securitization of $254 million in mortgage loans.  The court dismissed the plaintiff's claim for rescission and for breach of contract.  The court did not dismiss the plaintiff's breach of contract claims based on the statute of limitations, holding that those claims accrued on the Closing Date of the transaction and were brought within six years of accrual.  The court also denied Nomura's motion to dismiss based on the contractual sole remedy provision, holding that equitable damages for failure to repurchase loans are allowable where specific performance is unavailable.  Order.   

Trust Files Repuchase Lawsuit Against Natixis Real Estate Holdings

On July 8, IXIS Real Estate Capital Trust filed suit against Natixis Real Estate Holdings in New York Supreme Court, claiming that Natixis breached its obligation to cure or repurchase thousands of mortgage loans that Natixis had securitized into a $770 million RMBS trust.  IXIS alleges that more than 1,500 of the 4,000 loans in its trust did not conform to the representations and warranties made about the quality of the loans, including representations concerning payment delinquencies, loan-to-value ratios, debt-to-income ratios, and credit scores.  IXIS alleges that, after it examined the quality of the loans in the trust, it informed the originators and Natixis of the delinquencies, but that both breached their duties to repurchase the problematic loans.  IXIS asserts sixteen causes of action for breach of contract, broken out by loan originator, for Natixis's refusal to repurchase loans from specified originators.  IXIS seeks damages, prejudgment interest, and repurchase of the loans at issue.  IXIS is acting through Computershare Trust Company, which is the Separate Securities Administrator for the Trust.  Complaint.   

New York Supreme Court Limits Damages in Assured's RMBS Suit Against Deutsche Bank

On July 3, Justice Shirley Werner Kornreich of the New York Supreme Court limited the scope of monoline insurer Assured Guarantee Municipal Corp.'s potential damages in its RMBS lawsuit against two Deutsche Bank affiliates.  Assured alleged that the bank had breached representations and warranties in an insurance and indemnity agreement concerning the quality of certain insured mortgage loans.  Assured sought to put back the nonconforming loans and sought compensatory and rescissory damages and legal costs.  Deutsche Bank moved for partial summary judgment on the grounds that Assured was not entitled to damages resulting from conforming loans under the parties' loan repurchase agreement, that Assured's notice of problematic loans was insufficient, and that Assured was not entitled to legal costs under the insurance and indemnity agreement.  The court granted Deutsche Bank's motion in part.  It ruled that because Assured had agreed to bear to the risk of loans that conformed to the representations in the governing agreements, it could not recoup any losses that resulted from such loans.  Rather, Assured could assert only put-back claims in connection with its losses from nonconforming loans.  Moreover, the court determined that Assured could not recover any rescissory damages because it had forfeited its right to rescission when it sought to enforce its put-back rights.  The court found, however, that Assured properly informed Deutsche Bank of the alleged breaches and that the insurance and indemnity agreement permitted Assured to seek legal fees and costs in this action.  Order.  In a related case, Justice Kornreich also granted Credit Suisse's motion to dismiss fraud claims by Assured on the grounds that Assured had assumed the risk of losses outside of the representations and warranties and that its fraud claims were duplicative of its put-back claims.  Order.

Prudential Files Suit Against Bank of America and Merrill Lynch Over US$119 Million in RMBS

On June 26, two Prudential entities sued Bank of America, Merrill Lynch, and First Franklin in New Jersey State Superior Court regarding Prudential's alleged purchase of US$119 million worth of RMBS from the defendants.  Prudential alleges that, in their roles as underwriter, seller, and depositor of the securitizations at issue, the defendants misrepresented the quality of the RMBS and their underlying loans, including information about underwriting standards, owner occupation, loan-to-value ratios, and credit ratings.  Prudential asserts causes of action for common law fraud, aiding and abetting, negligent misrepresentation, and violation of New Jersey's RICO law.  It requests rescission of the RMBS certificates and compensatory and punitive damages, among other forms of relief.  On July 3, the defendants removed the case to the United States District Court for the District of New Jersey, noting that a New Jersey federal court had previously dismissed identical claims by Prudential in a similar action involving many of the same securitizations and that the two Prudential entities that brought this state court action had been voluntarily dropped from the federal suit.  ComplaintNotice of Removal

European Financial Industry Developments

PRA Consults on Proposed Changes to CRD IV

The UK's macro-prudential regulator, the Prudential Regulation Authority (PRA), has launched a consultation on proposed changes to its CRD IV implementation rules.

CRD IV is a wide-ranging package of EU reforms (2013/36/EU) introducing new prudential requirements for credit institutions and investment firms with the aim of resolving several issues highlighted by the 2007/2008 financial crisis.  The PRA published rules and supervisory statements to implement CRD IV in December 2013.  Following industry feedback received since then, the PRA is now consulting on changes to those rules and supervisory statements in the following areas:

  • Credit risk mitigation
  • Credit risk
  • Governance
  • Market risk

Consultation Paper.

FCA Statement on EMIR Reporting Advice for Clearing Member Firms

On June 30,  the UK's financial regulator, the Financial Conduct Authority (FCA), published a statement containing reporting advice for clearing member firms under EMIR (648/2012/EU).

One of several reforms to regulatory regimes following in the wake of the 2007/2008 financial crisis, EMIR is the new European regulation on derivatives, central counterparties and trade repositories, the main purpose of which is to increase the stability of the derivatives market by imposing three main obligations on participants, one of which, is a reporting obligation.

Since February 12, 2014, when parties enter into a derivative transaction, data concerning the deal is to be reported to a central repository within one day of the transaction date. The FCA statement states that the regulator has contacted a number of authorized firms that have been identified as a clearing member and client of a central counterparty (CCP) to advise them that authorized or recognized CCPs under EMIR are required to calculate hypothetical capital information. This information must be supplied by CCPs to their clearing members as well as to the competent authority of the clearing member. FCA Statement.

BCBS and IOSCO Announce Task Force to Review Global Securitisation Markets

The Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO) announced on July 3 that they will lead a task force to undertake a review of global securitisation markets.

It is intended that the review will:

    • survey securitization markets with the aim of understanding how they are evolving in different parts of the world;
    • identify factors that may be hindering the development of sustainable securitization markets;
    • assess whether there are factors inhibiting the participation of investors, particularly non-bank investors; and
    • develop criteria to identify and assist in the development of simple and transparent securitization structures.

As part of the review process, the task force has set up an online survey so that it can better understand market participants' views. Survey.

FCA and PRA Review of Barriers to Entry for New Banks

The FCA and the PRA have published a review of changes that were implemented in 2013 as an attempt to reduce barriers to entry for new financial institutions.

The changes focused on simplifying the authorization process for new banks and a shift in prudential regulation (including a reduction in the minimum amount of initial capital required by small credit institutions). Report.

EBA Publishes Opinion on CRD IV Macro-Prudential Rules

The European Banking Authority (EBA) has published an opinion on the macro-prudential rules in the Capital Requirements Regulation (Regulation 575/2013) (CRR) and the CRD IV Directive (2013/36/EU), which includes an assessment of such rules against objectives of macro-prudential policy. Opinion.

HM Treasury Publishes Advisory Notice on Money Laundering and Terrorist Financing Controls in Overseas Jurisdictions

HM Treasury has published a revised advisory notice on money laundering and terrorist financing controls in overseas jurisdictions. The notice contains advice regarding the risks posed by unsatisfactory anti-money laundering and counter-terrorist financing controls in various overseas jurisdictions. Notice.

ESMA Publishes Final Report Setting Out Draft Regulatory Technical Standards Required Under the Credit Ratings Agency III Regulation

The European Securities and Markets Authority has published draft Regulatory Technical Standards ("RTS") under the Credit Ratings Agency III regulation.  The draft RTS address disclosure requirements for structured finance instruments, the European Rating Platform and periodic reporting on fees charged by credit rating agencies.  The European Commission now has three months to decide whether or not to endorse the proposed RTS.  Final Report.

Orrick Russian Law Alert: Unified Register of Pledges of Movable Property – Follow Up

The public unified register of pledges of movable property (the Register) was initially introduced by Federal Law No. 166-FZ, dated October 2, 2012. Later amendments to various legal acts, including the Russian Civil Code, introduced further regulation on the filing of such pledges with the Register. Please click here for Orrick's complete summary.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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