In his State of the Union address to the nation last week, President Obama announced the creation of the Residential Mortgage-Backed Securities Working Group (“the Working Group”). The Working Group, co-chaired by New York Attorney General Eric Schneiderman, along with the DOJ and SEC, is a new addition to the Financial Fraud Enforcement Task Force (“the Task Force”) created in 2009 by President Obama to investigate and prosecute a broad range of financial fraud on both the federal and state levels. The Working Group’s principal mission is to “streamline and strengthen the current and future efforts to identify, investigate, and prosecute instances of wrongdoing in the packaging, selling, and valuing of residential mortgage-backed securities.”
As its name suggests, the Working Group will target fraud in a broad range of areas related to the residential mortgage-backed securities (“RMBS”) market, including alleged misrepresentations about the quality of mortgages backing the RMBS made by all parties involved in loan origination and securitization; failure to properly manage the assets within the loan pools; failure by RMBS sponsors to satisfy certain obligations related to repurchase obligations; as well as other areas such as foreclosure documentation and alleged Mortgage Electronic Registration Systems (“MERS”) title issues.
Impact – Why This Matters Now
With New York Attorney General Schneiderman at the helm, the Working Group has already begun to usher in a new wave of enforcement and has reinvigorated criminal and civil investigations against RMBS market participants. The Working Group has already issued 11 subpoenas to financial institutions, with “more on the way” according to Attorney General Eric Holder. Just days after the formation of the Working Group, it announced the guilty pleas of two senior traders on fraud charges related to misrepresentations about the health of the subprime mortgage market. And, on February 3, 2012, New York Attorney General Schneiderman filed a civil complaint alleging MERS improprieties against three major banks, with similar actions by other states attorneys general.
Extending previous enforcement activity in this arena, the formation of the Working Group means more boots on the ground in pursuit of a wider range of alleged wrongdoing — including actions targeting different conduct, different individuals, and different theories than those raised in the past. The Working Group has announced that it will be comprised of 55 criminal and civil attorneys, investigators, and analysts from the DOJ, in addition to the resources of the SEC and numerous state attorneys general. Moreover, the broad membership of the Working Group, which includes the new Consumer Financial Protection Bureau (“CFPB”), indicates that investigations and enforcement will touch upon a range of new issues including insurance and tax issues.
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