While we wait (and wait) for the Securities and Exchange
Commission to expand its docket of mortgage-backed securities enforcement actions beyond the Option One case and for the
Justice Department's joint MBS task force to file any case at
all, here's something to contemplate. Tuesday's $3.5 million fine against Citigroup Global Markets for posting inaccurate
data about mortgages in underlying MBS loan pools marks the
fifth time the Financial Industry Regulatory Authority has taken
on a major MBS issuer. Yes, the private agency FINRA has a more
robust enforcement record against banks in the MBS biz than any
state or federal authority. FINRA's MBS actions began with a
$7.5 million fine for Deutsche Bank in July 2010 and continued
with a $4.5 million action against Credit Suisse, a $3 million case against Merrill Lynch in May 2011 and a $3 million sanction of Barclays last November.
All of the cases involved failures by the banks to comply
with a FINRA regulation that requires asset-backed securities
issuers to post accurate and up-to-date performance data on the
underlying assets. The rule was supposed to give MBS investors
information about the loans bundled into the banks'
mortgage-backed note offerings as well as the historical
performance of similar offerings. The banks, according to FINRA,
received or had access to monthly reports containing the
necessary data but didn't take adequate care to assure the
accuracy of the information posted on their sites.
Citi, for example, received numerous reports indicating that
it was understating delinquencies, foreclosures and borrower
bankruptcies, according to FINRA. Nevertheless, the bank "failed
to investigate to determine whether it had posted inaccurate
performance data." (Citi and the other banks did not admit or
deny the allegations as part of their settlements.)
The FINRA regulation has no analog in federal securities
law, so we can't blame the SEC for neglecting to bring such
relatively simple disclosure cases. (Private investors who
wanted to sue based on the FINRA-mandated disclosures, moreover,
would have to be able to show that they relied directly on the
banks' posted MBS data to make investment decisions.) But we can
hail FINRA staffers, who have no subpoena power because they're
a private regulator, for having the ingenuity to hold MBS
"I'm proud we've been able to do what we've been able to
do," said FINRA enforcement chief Brad Bennett, who added that
his staff worked hard to establish that what the banks posted
about their mortgage-backed notes was not accurate information.
"It's essential that investors, in deciding whether to purchase
mortgage-backed securities, have a complete and accurate picture
of data relating to the performance of the underlying
mortgages," Bennett said. "Otherwise, it's like buying a car
with an erroneous vehicle history report."
I'm glad FINRA found a way to bring MBS actions against
banks that allegedly mislead MBS investors. Here's hoping that
it soon has regulatory company.
(Reporting by Alison Frankel)
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