Case Update: Madden v. Midland Funding

Despite the strong petition and amici briefs, the Second Circuit denied the request to rehear the Madden v. Midland Funding case.  With the denial of the petition on August 12 (order attached), it is now clear that Madden is the law of the Circuit and will remain so unless and until the Supreme Court steps in. 

There are several important state law issues that the court of appeals in Madden left open that will be addressed by the district court on remand – such as whether the district court will honor the choice of law designation of the parties (designating Delaware law as governing the loans) and, if New York law applies, whether New York law would assess the legality of the rate by looking to whether it was lawful at the inception of the loan.  The denial of the en banc petition, however, does not mean that we are likely to get those answers soon. 

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5th Circuit Revives FDIC's Suit Against Goldman, Deutsche Bank, and Royal Bank of Scotland

On August 10, 2015, the Fifth Circuit revived a securities fraud suit brought by the Federal Deposit Insurance Corporation ("FDIC") as receiver for Guaranty Bank against Goldman Sachs & Co., Deutsche Bank AG, and the Royal Bank of Scotland PLC. The FDIC brought claims under the federal Securities Act and the Texas Securities Act, alleging that the defendants made false and misleading statements in selling and underwriting $2.1 billion in RMBS to Guaranty Bank. The suit was filed within the limitations period in the FDIC Extender Statute, 12 U.S.C. § 1821(d)(14), but outside of the limitations period in the Texas Securities Act. The district court held that state law statutes of repose are not pre-empted by the FDIC Extender Statute, and it therefore dismissed the case as untimely. The Fifth Circuit reversed and remanded. The appellate court held that the FDIC Extender Statute preempts all state limitations periods, whether characterized as statutes of limitations or as statutes of repose. The court distinguished the Supreme Court's decision in CTS Corp. v. Waldburger, 134 S. Ct. 2175 (2014), which held that a similar extender provision in CERCLA did not preempt state statutes of repose. The Fifth Circuit characterized the similarities between the two provisions as "superficial," and cited legislative history as supporting Congress's intent to preempt state statutes of repose. Opinion.

RMBS Investors Sue U.S. Bank for Trust Losses

On August 5, 2015, RMBS investors filed a putative class action against U.S. Bank, N.A. in the Supreme Court for the State of New York. The investors assert that U.S. Bank, as trustee for the MASTR Adjustable Rate Mortgage Trust 2006-OA2, harmed certificateholders in failing to timely request repurchase of defective mortgage loans by the sponsor, UBS Real Estate Securities. The investors cite recent decisions, previously covered here and here, out of the New York federal court dismissing the trustee's claims against U.B.S. as time-barred as to certain loans. The complaint includes claims for breach of fiduciary duty, breach of duty to avoid conflicts of interest, breach of the implied covenant of good faith and fair dealing, and violation of New York's Streit Act. Complaint.

EBA Final Guidelines on Passport Notifications for Mortgage Credit Intermediaries

On August 11, 2015, the European Banking Authority (EBA) published its final guidelines (EBA/GL/2015/19) on passport notifications for mortgage credit intermediaries under the Mortgage Credit Directive (2014/17/EU) (MCD).

The guidelines specify the information that firms seeking to passport under the MCD should provide to competent authorities in their passport notifications and include templates for the notification forms that firms should complete for these purposes. The guidelines also contain guidance on the transmission of information about passport notifications to competent authorities in host member states and on the information about passporting firms that competent authorities should make publicly available.

The EBA consulted on the guidelines in June 2015.

The guidelines apply from March 21, 2016, the transposition date for the MCD, with the exception of certain information requirements for competent authorities that apply from the day after the date the guidelines are published in the official languages of the EU.

ESMA Reports to European Commission on Functioning of EMIR Framework

On August 13, 2015, the European Securities and Markets Authority (ESMA) published four reports on how the EMIR (the Regulation on over the counter derivative transactions, central counterparties and trade repositories) (Regulation 648/2012)) framework has been functioning and providing input to the European Commission's EMIR review.

The first three reports set out below are required under Article 85(1) of EMIR and the fourth responds to the Commission's EMIR review.

1.  Review of the use of over-the-counter (OTC) derivatives by non-financial counterparties (ESMA/2015/1251)

This report provides an overview of non-financial counterparties (NFCs) and issues relating to their classification, together with an analysis of the systemic importance of transactions carried out by NFCs in OTC derivatives markets. ESMA concludes that, when compared to financial counterparties, the systemic relevance of NFCs appears limited, although they are significant players in the commodity OTC derivatives market and to a lesser extent in the foreign exchange OTC derivatives market. ESMA's main proposals relate to a better and simpler identification of NFCs and a simplification of the framework applicable to NFCs. This would be achieved, for example, by removing the hedging criteria when assessing the systemic importance of NFCs to ensure that the entities that come above the clearing threshold are the ones which actually pose the most significant risks to the system. ESMA believes its proposals will greatly simplify the process and reduce the compliance costs for the majority of small and medium NFCs, which pose limited systemic risk.

2.  Review of the efficiency of margining requirements to limit pro-cyclicality (ESMA/2015/1252)

This report analyses the relevant regulatory provisions and discusses their efficiency in limiting pro-cyclical effects on margin requirements and collateral used to cover margin requirements. ESMA recommends further specifying the rules for implementing the counter-cyclical tools adopted by central counterparties (CCPs) for margins and collateral, including regular testing and transparent results.

3.  Review of the segregation and portability requirements (ESMA/2015/1253)

This report relates to the application of the segregation requirements set out in Article 39 of EMIR. It summarises the provisions relating to segregation and portability and provides a recap of the establishment and evolution of CCPs in the EU during EMIR implementation. ESMA suggests that clarifications and more granular requirements on segregation and portability could be introduced by regulatory technical standards. It also proposes to monitor the implementation of different types of account models to assess and ensure that the expected benefits materialise and to track undue constraints. Finally, the report addresses the evolution of CCPs' policies on collateral margining and securing requirements and their adaptation to the specific activities and risk profiles of their users.

4.   ESMA input as part of the Commission consultation on the EMIR review (ESMA/2015/1254)

This report provides input to assist the Commission in its review beyond the three reports required under Article 85(1) of EMIR. Among other things, the report:

• flags issues relating to scope and definitions, and addresses in particular the case of municipalities and regional governments;
• describes the rigidity of the clearing obligation procedure and consequences of its lack of flexibility, indicating changes to improve it;
• raises issues with intragroup exemptions and the need for more clarity;
• raises concerns about the trade reporting requirements and makes a number of proposals, including how to adapt better the process to the variety of counterparties that need to report;
• flags the limitations of the recognition process for third-country CCPs; and
• suggests some amendments to address issues relating to the requirements for trade repositories.

Securitization Spotlight Session – Marketplace Lending

Join us on September 10, for SIFMA's next Spotlight Session to take a deeper dive into this lending practice and the nascent securitization market that is helping to fund it. This complimentary webinar will feature a panel of experts who will provide an overview on how marketplace lending platforms originate loans, how they fund these loans, market dynamics, how securitization plays a role and what are the prospects for the future.

Confirmed speakers include:

• Howard S. Altarescu, Partner, Co-head of Global Finance Business Unit, Orrick, Herrington & Sutcliffe
• Stuart M. Litwin, Partner, Co-head of Structured Finance & Capital Markets, Mayer Brown
• Henry G. Morriello, Partner, Chair of Finance Department & Head of Structured Finance Group, Kaye Scholer
• John K. Van De Weert, Partner, Sidley Austin

Please click here to register.