Orrick's Financial Industry Week in Review - January 22, 1013

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Financial Industry Developments
 

CFPB Final Rule on Mortgage Servicing Standards

On January 18, the CFPB released final rules, effective January 10, 2014, which set forth national mortgage loan servicing standards.  The final rules address, among other things, servicers’ obligations to: (i) correct errors asserted by borrowers; (ii) provide protections in connection with ‘force-placed’ insurance; (iii) establish reasonable policies and procedures; (iv) provide information about loss mitigation options to borrowers; and (v) evaluate applications for available loss mitigation options.  CFPB Release.  CFPB Final Rule.  CFPB Fact Sheet.  CFPB Summary.    

Joint Rule on Appraisals for Higher-Priced Mortgage Loans

On January 18, the Fed, CFPB, FDIC, FHFA, NCUA and OCC issued a joint final rule, effective January 18, 2014, which establishes new appraisal requirements for “higher-priced mortgage loans”.  For these loans, the rule requires creditors to: (i) use a licensed or certified appraiser who prepares a written appraisal report based on a physical visit of the interior of the property and (ii) disclose to applicants information about the purpose of the appraisal and provide consumers with a free copy of any appraisal report.  Joint Release.  Final Rule.    

CFPB Final Rule on Written Appraisals

On January 18, the CFPB issued a final rule, effective January 18, 2014, which amends the Equal Credit Opportunity Act to require mortgage loan creditors to: (i) automatically provide applicants with a copy of appraisal reports and other written valuations prepared in connection with first lien loans secured by a dwelling and (ii) provide applicants with a disclosure at the beginning of the application process.  CFPB Release.  CFPB Final Rule.  CFPB Summary.    

SEC Extension of Comment Period for Rule on Swap Requirements

On January 15, the SEC extended the comment period for its proposed rule to establish capital, margin, and segregation requirements for security-based swap dealers and major security-based swap participants.  The original comment deadline of January 22 has been extended to February 22.  SEC Proposed Rule.

Rating Agency Developments
 

On January 14, DBRS published its recovery ratings for non-investment grade corporate issuers.  DBRS Release.   

RMBS Litigation
 

$193 Million RMBS Suit Against Countrywide Dismissed as Untimely

On January 10, Judge Mariana R. Pfaelzer of the United States District Court for the Central District of California dismissed a $193 million suit brought by mutual fund Asset Management Fund against several Bank of America and several related entities, including Merrill Lynch and Countrywide Financial.  The case initially was brought in New York Supreme Court and was removed to federal court and later transferred to be part of the Countrywide Multi-District Litigation.  The plaintiffs brought claims for common law fraud, fraudulent concealment, negligent misrepresentation, and aiding and abetting the fraud of others.  The court held that the suit, alleging misrepresentations regarding the underlying mortgage loans including compliance with underwriting rate of owner occupancy, ratio of LTV, and transfer of title, was untimely under all of the statutes of limitations that could apply.  The court granted Asset Management Fund leave to replead as to the $10 million purchase of RMBS it allegedly made after March 1, 2007.  Decision.

MBIA Sues Flagstar Bank In Connection With Insurance Of $1 Billion in RMBS

On January 11, monoline insurer MBIA Insurance Corp. sued Flagstar Bank and its affiliates for breach of contract in the United States District Court for the Southern District of New York.  MBIA alleges that it insured $1 billion in RMBS for Flagstar in 2006 and 2007.  The complaint claims that Flagstar made misrepresentations about the allegedly defective loans underlying the securities.  Further, MBIA alleges it has made claims payments in excess of $165 million, and that Flagstar has breached its contractual obligation to repurchase the allegedly defective loans.  Complaint.

European Financial Industry Developments
 

FSA Finalized Guidance in Relation to Risks to Customers from Financial Incentives

On January 16, the FSA published finalized guidance in relation to risks to customers from financial incentives (FG13/01).  FG13/01 follows a review of sales incentives conducted by the FSA from September 2010 to September 2011 that found that most firms have in place incentive schemes likely to cause mis-selling, and that firms did not have in place effective systems and controls to manage these risks.  FG13/01 gives examples of these findings, and provides guidance on the action it expects firms to take, including:

    • proper consideration of whether their incentive schemes increase the risk of mis-selling and, if so, how;
    • effective review of whether their governance and controls are adequate; and
    • action to address any inadequacies – for example changing their governance and/or controls, and/or changing their schemes.

FG13/01 applies to all firms in retail financial services with staff who are part of an incentive scheme and deal directly with retail customer transactions.  It should also be considered by wholesale firms with staff in sales roles.  The FSA expects firms to be compliant with FG13/01 from the date of its publication.

British Bankers’ Association Publishes Paper on Strengthening Professional Standards

On January 15, the British Bankers’ Association (BBA) published a submission made to the Chairman of the Parliamentary Commission on Banking Standards.  The Commission was established in July 2012 with a remit to consider and report on professional standards in the UK banking sector, particularly in light of the LIBOR investigations.

The submission sets out potential ways in which banking standards might be raised, which are summarized in the covering letter to the submission as follows: 

    • strengthening the existing framework by increasing regulatory training, focusing on enforcement, extending the scope of the existing approved persons regime to cover an increased number of roles and putting in place an overarching requirement for all bank employees to adhere to the approved persons principles;
    • establishing an overarching professional standards body to promote existing standards and produce guidance/set additional standards for the training of all bank employees;
    • and establishing the Banking Standards Review Council as an independent body to monitor ethical and professional standards in UK banks and to uphold an industry wide code of conduct.

Charges Brought Against Former Trader and Former Broker Following FSA Insider Dealing Investigation

On January 16, Paul Milsom, a former trader at the investment management arm of Legal & General, and Graeme Shelley, a former broker at Novum Securities, appeared at Westminster Magistrates Court charged with insider dealing.  Mr Milsom indicated an intention to plead guilty to one charge, encompassing 28 separate instances of passing information to Mr Shelley during the period of 2008 to 2010.  Mr Shelley correspondingly faces 28 counts of insider dealing.  It is alleged that profits of around £402,000 were split between the two defendants as a result of Mr Shelley placing contracts for difference in the knowledge that large trades placed by Mr Milsom would move the market in a certain direction.

The prosecution arose from a joint investigation by the FSA and the Serious Organized Crime Agency, marking the FSA’s largest insider dealing investigation to date.  Five other defendants have already been charged as part of the same investigation, reflecting the FSA’s ever increasing readiness to bring criminal prosecutions against those suspected of market abuse.

Events
 

American Securitization Forum 2013 Conference

January 27-30, 2013 – ASF 2013 is the largest capital markets conference in the world. Hosted by the American Securitization Forum at the ARIA Hotel and Convention Center in Las Vegas, NV., the conference attracts the industry's top professionals where they will discuss the most relevant topics and challenges in the industry.  Orrick is an Associate-level sponsor, and several partners, of counsel and associates will attend.  On January 28, Howard Altarescu will be speaking on a panel regarding the Private Label RMBS Sector.  Click here to view the current agenda.