Banking and Finance Law Daily Mortgage-backed securities settlement to cost Credit Suisse nearly $5.3 billion
Thursday, January 19, 2017

Mortgage-backed securities settlement to cost Credit Suisse nearly $5.3 billion

By Richard A. Roth, J.D.

Credit Suisse has agreed to pay a $2.48 billion civil penalty and provide an additional $2.8 billion in assistance to homeowners and communities to settle charges that it misrepresented the quality of residential mortgage-backed securities it originated. The relevant RMBS were underwritten and issued between 2005 and 2007. Attorney General Loretta E. Lynch said the settlement "underscores that the Department of Justice will hold accountable the institutions responsible for the financial crisis of 2008."

The settlement agreement notes that it does not constitute a judicial finding or a court order; however, under the agreement, Credit Suisse "acknowledges the facts" contained in an attached agreed statement. Notably, the settlement agreement only resolves the bank’s civil liability. The government still has the ability to bring criminal charges against the bank or any of its employees, and the bank has agreed to cooperate in any criminal investigations or prosecutions.

Statement of facts. The statement of facts describes what the Justice Department calls Credit Suisse’s "false and misleading representations to prospective investors about the characteristics of the mortgage loans it securitized." The statement of facts includes that the bank:

  • knew many of the securitized loans did not meet the claimed underwriting standards, to the extent that bank employees referred to some loans as "complete crap" and "[u]tter complete garbage";
  • did not carry out proper reviews of loans it bought from other lenders;
  • misrepresented to investors and rating agencies that Credit Suisse senior underwriters had made final decisions;
  • knew of and concealed credit quality problems with purchased loans;
  • knew and concealed that many purchased loans were made based on inflated appraisals;
  • reduced loan quality control reviews by third-party vendors in order to avoid creating a written record of known defects; and
  • knowingly securitized questionable loans and hoped to avoid repurchase demands rather than holding the loans in the bank’s own inventory.

Consumer relief. Relief to be offered to consumers under the settlement includes loan modifications; principal forgiveness or forbearance for both first and subordinate lien loans; and assistance in the creation of affordable housing, for both sale and rent. At least $1.75 billion of the $2.8 billion assistance amount must go toward loan modifications that include principal forgiveness or forbearance, at least $980 million of which must be for first-lien loans.

Covered RMBS. The settlement agreement incorporates a seven-page list of the various securitizations that are covered. However, the list adds that any Credit Suisse securitization between 2002 and 2007 is to be treated as if it were on the list even if it was inadvertently not included.

Companies: Credit Suisse

MainStory: TopStory EnforcementActions Mortgages SecuritiesDerivatives

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