October 17, 2013
Carson City, NV – Nevada Attorney General Catherine Cortez Masto announced that DB Structured Products, Inc. (DB) will pay the State $11.5 million as part of an agreement, called an assurance of discontinuance, to resolve an investigation into the firm’s role in purchasing and securitizing subprime and Alt-A mortgage loans in Nevada.
The agreement filed in the District Court in Clark County also requires DB to commit to changes in its practice to securitize Nevada mortgages. The $11.5 million will be used for payments to affected borrowers, mortgage fraud enforcement, and pay the costs of the State’s investigation.
“I remain committed to enforcing Nevada’s laws against the players – including those on Wall Street – that contributed to and profited from mortgage lending and sales practices that misled Nevada consumers into loans that they did not understand and could not repay,” said Masto. “The payment from DB will help alleviate some of the injury to Nevada consumers and the changes to its securitization process should help make sure that we do not go down this road again.”
The nearly two year investigation centered upon potential misrepresentations by lenders, including New Century, American Home Mortgage and MortgageIT, to Nevada consumers who took out subprime loans and Alt-A loans that were funded, bought and securitized by DB between 2004 and 2007. These include whether lenders deceived consumers about the actual interest rate and payments on their loans, and the potential payment shock when the initial “teaser” or “interest-only” rates on their mortgages expired.
In addition, the investigation examined whether lenders originated loans with multiple risk features that allowed them to approve loans without proper consideration of the borrowers’ ability to repay. These layered risks included loans that: featured adjustable interest rates, extended amortization periods and pre-payment penalties; were predicated on stated income applications and 100% financing; and were qualified on the basis of initial teaser rates and not the adjusted rates that would be in effect for most of the loan term.
The Nevada Attorney General also examined the extent to which DB was aware of the lenders’ allegedly deceptive practices through its due diligence process when it bought the loans and whether DB substantially assisted these lenders by financing and purchasing their loans.
The agreement includes the following conduct provisions going forward:
- DB only will finance, purchase, or securitize Nevada subprime mortgage loans if it has engaged in a review of such loans and determined that the loans comply with the Nevada Deceptive Trade Practices Act.
- DB will not securitize loans where upon review it has reason to believe that the lender has not adequately disclosed to the borrowers the existence of an initial teaser rate, the potential negative amortization on the loan, the maximum adjusted interest rate or payments, and the potential for payment shock if payments increase after a loan reset or recast.
Borrowers eligible for relief will be notified by the Nevada Attorney General’s Office in the future. No application or qualification process will be required and borrowers will not be required to release any claims that they may have against their lenders or against DB. Only borrowers whose loans were financed or acquired by DB are covered by this Assurance.
The agreement, which follows the Attorney General’s settlements in the last two years with Morgan Stanley and RBS Financial Products, continues her work to hold financial institutions and other entities accountable for their roles in the housing crisis that has imposed an enormous toll on Nevada homeowners and communities and the State’s economy.
In all, the Attorney General has recovered roughly $80 million from banks that funded and purchased deceptively originated mortgage loans. In 2009, Masto settled claims against Wells Fargo for claims that Wachovia Bank misled borrowers about the interest rate and payment due on their mortgages. Doing so misled borrowers about the interest rate and payment due on their mortgages and caused borrowers’ loan payments or principal balances to increase dramatically.
Masto was one of only two attorneys general in the country to file suit against Bank of America in 2010 for consumer fraud in its handling of mortgage modifications and foreclosures. Nevada’s settlement with Bank of America secured $30 million in additional relief for Nevada consumers and the bank’s commitment to at least $750 million of mortgage modifications and short sales in Nevada. The Attorney General’s Office also sued and is currently litigating against Lender Processing Service, which handles half of all foreclosures in the country, for engaging in widespread fraud in executing foreclosure-related documents and improperly controlling the foreclosure process.
Click here to read the assurance of discontinuance. The case was prosecuted by Sheri Forbes and Kristine Kuzemka, Senior Deputy Attorney Generals’ of the Bureau of Consumer Protection.
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