Orrick's Financial Industry Week in Review - May 6, 2013

Financial Industry Developments

FHFA Common Securitization Infrastructure

On April 30, the FHFA issued its progress report on the steps being taken to establish a common securitization infrastructure for MBS.  The FHFA is encouraging interested parties to provide written input on the progress report, and input must be received by June 30.  FHFA ReleaseFHFA Project Report.   

FHFA GSE Viability Reports

On May 3, the FHFA  released reports prepared by Fannie Mae and Freddie Mac on their multifamily businesses which conclude that without government guarantees, the multifamily businesses of Fannie and Freddie have little inherent valueFHFA ReleaseFannie Mae Report.  Freddie Mac Report.   

FSOC Annual Report

On April 30, the FSOC released its 2013 annual report required pursuant to the Dodd-Frank Act.  The report focuses on seven key themes:  (i) vulnerability to runs in wholesale funding markets that can lead to destabilizing fire sales; (ii) the reliance of the housing finance system on government and agency guarantees; (iii) operational risks; (iv) reliance on reference interest rates, including LIBOR; (v) resilience to interest rate risk; (vi) long-term fiscal imbalances; and (vii) U.S. sensitivity to possible adverse developments in foreign countries.  FSOC Report.     

SEC Proposed Rules for Cross-Border Swaps

On May 1, the SEC proposed rules and interpretive guidance for parties to cross-border security-based swap transactions.  Comments on the proposed rules must be submitted within 60 days of publication in the Federal Register.  SEC Release and Fact Sheet.   

Rating Agency Developments

On May 2, KBRA released its methodology for rating global banks and bank holding companiesKBRA Report

On April 30, Fitch released its criteria for rating U.S. auto lease ABSFitch Report

On April 26. S&P released its criteria for rating Canadian auto loan ABSS&P Report

Note: Free registration is required for rating agency releases and reports.

RMBS Litigation

Court Issues Summary Judgment Ruling in MBIA’s RMBS Action Against Countrywide

On April 29, Justice Eileen Bransten of the New York State Supreme Court issued an opinion granting in part and denying in part competing motions for summary judgment filed by MBIA and Countrywide in connection with tort and contract claims MBIA asserted concerning its insurance policies wrapping certain Countrywide RMBS.  With respect to Countrywide’s motion, the Court i) granted Countrywide’s motion to dismiss MBIA’s claim for indemnification because the contract did not unequivocally provide MBIA with a right to indemnification for claims between the parties; (ii) denied the motion as to MBIA’s fraudulent inducement claim because of  Countrywide’s failure to demonstrate that justifiable reliance is a required element of the claim under either statutory or common law; (iii) denied the motion as to claims for breach of the insurance agreements, holding that the language of the insurance agreement at issue did not limit MBIA to a “sole remedy” of repurchase and that MBIA had presented sufficient evidence to raise a triable issue that Countrywide was on notice of breaches throughout the collateral pools backing the RMBS at issue; (iv) ruled that MBIA had created issues of fact as to whether Countrywide committed servicing breaches with gross negligence; and (v) found triable issues of fact exist with respect to MBIA’s request for punitive damages in connection with its fraudulent inducement claim.

With respect to MBIA’s motion for summary judgment, the Court i) ruled that loans need not be in default in order to be eligible for repurchase; ii) found factual issues as to whether loans Countrywide classified as “severely unsatisfactory” breached Countrywide’s representations; iii) rejected MBIA’s argument that Countrywide’s refusal to repurchase loans constituted an anticipatory repudiation of its repurchase obligations; and iv) found that Countrywide had failed to raise triable fact issues on a loan-by-loan basis concerning  the falsity of representations including as to appraisals, defaults, the accuracy of the mortgage loan schedule, and the contents of mortgage loan files.  The Court ruled that whether those breaches were sufficiently material and adverse to trigger Countrywide’s repurchase obligation was a question for trial.  Because that issue remains for trial, the Court declined MBIA’s request to extrapolate breach findings within a loan sample to the entire pool of loans at issue.  Order.   

Second Circuit Ruling Applied to Revive MBS Claims

On May 1, Judge Harold Baer, Jr. of the U.S. District Court for the Southern District of New York reinstated previously dismissed claims in two class actions brought by several pension fund plaintiffs against Royal Bank of Scotland Group PLC and Residential Capital LLC, among others.  Judge Baer had previously dismissed claims under the Securities Act of 1933 as to certain RMBS for lack of standing.  In light of a recent Second Circuit decision, NECA-IBEW Health & Welfare Fund v. Goldman Sachs & Co., 693 F.3d 145 (2d Cir. 2012), Judge Baer reconsidered his prior orders and held that the plaintiffs had standing to assert claims on behalf of purchasers of all RMBS issued under the same shelf registrations that were backed by mortgages originated by the same lenders that originated the mortgages backing the certificates purchased by the named plaintiffs.  The court’s order revived claims with respect to a total of 49 offerings across both cases that previously had been dismissed.  Order.   

MBIA and Flagstar Settle

On May 2, MBIA Insurance Corporation announced that it reached a settlement with Flagstar Bank in its lawsuit arising out of $1 billion in Flagstar-sponsored MBS that MBIA insured.  MBIA sued Flagstar for breach of warranty under the insurance agreements, breach of the repurchase protocol, material breach of the insurance agreements, and reimbursement.  MBIA alleged that representations and warranties made by Flagstar about the insured mortgage loans and about Flagstar’s operations and quality-control procedures were false.  Under the terms of the Settlement Agreement, MBIA will receive $110 million in cash and other consideration in return for termination of the pending lawsuit. Press Release.

European Financial Industry Developments

Directors Remuneration: Enterprise and Regulatory Reform Act 2013 Published

On May 2, the Enterprise and Regulatory Reform Act 2013 (ERRA) was published.  The ERRA amends the Companies Act 2006 and introduces the following key changes to the legal framework for directors' remuneration in quoted companies: the directors' remuneration report must include a separate forward-looking policy part, the policy part must be approved by ordinary resolution at least every three years, the policy section must be approved before the expiry of the three-year period if the company wishes to change the policy or the shareholders did not approve the advisory vote on the non-policy section of the directors' remuneration report at the company's previous AGM, the company is prohibited from making a remuneration or loss of office payment, unless it is consistent with the most recently approved remuneration policy, any payment which is inconsistent with an approved policy will be held by the recipient in trust and can be recovered by way of a derivative action. Directors who authorised the payment will be liable for any loss to the company unless they can demonstrate that they acted honestly and reasonably.

These provisions are expected to come into force on October 1, with the provisions applying to quoted companies with financial years beginning on or after that date.

FCA Urges Firms to Update Status Disclosures to Reflect Creation of the FCA and PRA

On May 1, the FCA published a press release stating that it expects firms to review their regulatory status disclosures as a priority and ensure that they are up to date and accurate following the creation of the FCA and PRA and the renaming of the public Financial Services register. The FCA has stated that it recognises that there are exceptional circumstances where it may not have been possible to make all the required disclosure updates immediately upon the relevant change. However, the FSA, except for where transitional provisions are available, requires firms to be able to demonstrate that they intend to make the necessary updates at the earliest opportunity.