Enforcement and Litigation Update

MBA Regulatory Compliance Conference Washington, D.C.

Andrew L. Sandler
Chairman & Executive Partner BuckleySandler LLP

Overview: Enforcement and Litigation Update Loan Securitizations

FHFA Lawsuits Against Participants in Sales of Subprime MBS to GSEs False Claims Act Lawsuits Against FHA Lenders

Mortgage Servicing
Consent Decrees with Major Mortgage Servicers State AG Multi-State Investigations OCC Supervisory Guidance

DOJ Fair Lending Activity

2 Enforcement and Litigation Update Andrew L. Sandler, Chairman & Executive Partner, BuckleySandler LLP

Loan Securitizations: FHFA Lawsuits

18 lawsuits alleging violation of federal securities laws related to the sale of private-label MBS to GSEs Implicates both financial institutions and individuals Result of findings from 64 subpoenas issued in 2010 Implicates approximately $200 billion in MBS Complaints focus on misrepresentation of borrower and property characteristics (occupancy, income, LTV) Complaints ignore: Heavy GSE involvement in choosing collateral and structuring deals GSEs were seeking to meet federal affordable housing requirements Caused 5+% drop in stocks of defendant banks

3 Enforcement and Litigation Update Andrew L. Sandler, Chairman & Executive Partner, BuckleySandler LLP

Loan Securitizations: False Claims Act Litigation

U.S. Attorney for Southern District of New York bringing suit against FHA lenders
Deutsche Bank/MortgageIT Others being investigated.

Argue that errors in either loan-level underwriting certifications or annual certifications of compliance to FHA constitute false claims U.S. is seeking treble damages
($386 million in false claims) x 3 = $1.16 billion Seeking damages on all losses related to MortgageIT loans

Of note:
Not just chasing bad guys current investigations involve highly reputable banks whose delinquency compare ratios are within industry norms 10-year look back: Many key managers are long gone and documents are difficult to retrieve. 4
Enforcement and Litigation Update Andrew L. Sandler, Chairman & Executive Partner, BuckleySandler LLP

Mortgage Servicing: Consent Decrees with Major Servicers Foreclosure documentation crisis triggered nationwide multi-jurisdictional scrutiny of entire default servicing process Federal bank regulator horizontal review of 14 major institutions, MERS and LPS resulted in 16 consent decrees in April 2011 Generally adequate documentation of loan ownership, but weaknesses found in critical areas All foreclosed borrowers seriously delinquent notwithstanding process errors
5 Enforcement and Litigation Update Andrew L. Sandler, Chairman & Executive Partner, BuckleySandler LLP

Mortgage Servicing: Consent Decrees with Major Servicers

Substantial prospective action required: Single point of contact and cessation of dual-tracking; MIS improvements; Expanded compliance responsibilities throughout default process; and Expanded oversight over outside foreclosure and bankruptcy law firms. Servicers also required to engage in comprehensive risk assessment and loan file look back aimed at providing redress for borrowers financially harmed. Consent decrees will set baseline for national servicing expectations. June 30, 2011 OCC guidance aimed at ensuring that servicers adhere to appropriate foreclosure management standards requiring self-assessments and file reviews by all OCC-supervised servicers by end of 3Q11.

6 Enforcement and Litigation Update Andrew L. Sandler, Chairman & Executive Partner, BuckleySandler LLP

Mortgage Servicing: State Attorney General Multi-State Investigation

Investigation by multi-state Attorney General group ongoing and focused on five largest servicers. Working with the DOJ and CFPB. Despite settlements with regulators, more aggressive AG settlement widely reported to be imminent.
Term Sheet is clear attempt to set national servicing standards through enforcement action. Addresses: Foreclosure information and documentation; Governance of loss mitigation functions; Permissible fees; Payment posting; and Lender-placed insurance.

Resolution will set de facto servicing standards via 7 enforcement action. Enforcement and Litigation Update
Andrew L. Sandler, Chairman & Executive Partner, BuckleySandler LLP

Enforcement: DOJ Fair Lending

Expanded vision of redlining Cardinal Financial (July 2011) Seeks multi-county expansion of banks CRA assessment area due to its failure to expand in a sufficiently aggressive manner into minority areas Midwest BankCentre (June 2011) 7 branch, $1 billion community bank required to open full-service LMI branch Similar settlements in the 1990s involved banks that were ten times larger Citizens Republic (May 2011) Settlement similar to Midwest sharply criticized by federal judge in whose court settlement was filed 8
Enforcement and Litigation Update Andrew L. Sandler, Chairman & Executive Partner, BuckleySandler LLP

Enforcement: DOJ Fair Lending

Other cases of interest AIG settlement Banks responsible for disparities in broker pricing (March 2010) MGIC lawsuit (July 2011) PMI company and individual underwriters sued for not considering income of recent mothers still on leave More than 50 additional cases still under consideration by DOJ, with banking agencies sending more each week Increasing interest in disparate impact theory DOJ seeking extreme settlements on evidence we consider weak for first time in years, clients are seriously considering litigation rather than settling. 9
Enforcement and Litigation Update Andrew L. Sandler, Chairman & Executive Partner, BuckleySandler LLP

Contact Information

Andrew L. Sandler 202-349-8001 asandler@buckleysandler.com

10 Enforcement and Litigation Update Andrew L. Sandler, Chairman & Executive Partner, BuckleySandler LLP