Credit Suisse reaches $5.28 billion mortgage bond settlement

Required to provide $2.8 billion in consumer relief

For the second time in as many days, the Department of Justice announced that it reached a multi-billion dollar settlement with a foreign-based bank over its mortgage securitization practices leading up to the housing crisis.

On Tuesday, the DOJ announced that it reached a $7.2 billion settlement with Deutsche Bank in connection with the bank’s issuance and underwriting of residential mortgage-backed securities between 2005 and 2007.

Now, it’s Credit Suisse’s turn.

As with Deutsche Bank, Credit Suisse announced in late December that it reached a settlement in principle with the DOJ, but Wednesday, the DOJ made it official.

According to the DOJ, Credit Suisse will pay $5.28 billion in the settlement, which relates to the packaging, securitization, issuance, marketing and sale of residential mortgage-backed securities between 2005 and 2007.

Under the terms of the settlement, Credit Suisse will pay $2.48 billion as a civil penalty under the Financial Institutions Reform, Recovery and Enforcement Act.

The settlement also stipulates that Credit Suisse will provide $2.8 billion in other relief, including relief to underwater homeowners, distressed borrowers and affected communities, in the form of loan forgiveness and financing for affordable housing. 

According to the DOJ, Credit Suisse also agreed to provide financing for affordable rental and for-sale housing throughout the country.  “This agreement represents the most substantial commitment in any RMBS agreement to date to provide financing for affordable housing—a crucial need following the turmoil of the financial crisis,” the DOJ said in a statement.

“Today’s settlement underscores that the Department of Justice will hold accountable the institutions responsible for the financial crisis of 2008,” said Attorney General Loretta Lynch.

“Credit Suisse made false and irresponsible representations about residential mortgage-backed securities, which resulted in the loss of billions of dollars of wealth and took a painful toll on the lives of ordinary Americans,” Lynch continued.

“Under the terms of this settlement, Credit Suisse will pay $2.48 billion as a fine for its conduct,” Lynch added. “And Credit Suisse has pledged $2.8 billion in relief to struggling homeowners, borrowers, and communities affected by the bank’s lending practices. These sums reflect the huge breach of public trust committed by financial institutions like Credit Suisse.”

As with Deutsche Bank, the DOJ provided a laundry list of ways that Credit Suisse made “false and misleading representations” to RMBS investors, including:

  • Credit Suisse told investors in offering documents that the mortgage loans it securitized into RMBS “were originated generally in accordance with applicable underwriting guidelines,” except where “sufficient compensating factors were demonstrated by a prospective borrower.”  It also told investors that the loans “had been originated in compliance with all federal, state, and local laws and regulations, including all predatory and abusive lending laws.”
  • Credit Suisse has now acknowledged that “Credit Suisse repeatedly received information indicating that many of the loans reviewed did not conform to the representations that would be made by Credit Suisse to investors about the loans to be securitized.”  It has acknowledged that in many cases, it purchased and securitized loans into its RMBS that “did not comply with applicable underwriting guidelines and lacked sufficient factors” and/or “w[ere] not originated in compliance with applicable laws and regulations.”  Credit Suisse employees even referred to some loans they securitized as “bad loans,” “‘complete crap’ and ‘[u]tter complete garbage.’”
  • Credit Suisse acquired some of the mortgage loans it securitized by buying, from other loan originators, “Bulk” packages containing numerous loans.  For example, in December 2006, Credit Suisse purchased a “Bulk” pool of approximately 10,000 loans originated by Countrywide Home Loans.  Credit Suisse selected fewer than 10 percent of these loans for due diligence review.  “Reports from Credit Suisse’s due diligence vendors showed that approximately 85 percent of the loans in this sample violated Countrywide’s underwriting guidelines and/or applicable law,” but “Credit Suisse securitized over half of the loans into various RMBS it then sold to investors.”  Credit Suisse did not review the remaining unsampled 90 percent of the pool to determine whether those loans had similar problems.  Instead, it “securitized an additional $1.5 billion worth of unsampled—and therefore unreviewed—loans from this pool into various RMBS it then sold to investors.”  A Credit Suisse manager wrote to another manager who was reviewing these loans, “Thanks for working thru this mess.  If it helps, it looks like we will make a killing on this trade.”
  • Credit Suisse has acknowledged that it also “received reports from vendors that it might have been acquiring and securitizing loans with inflated appraisals” and that its approach for reviewing the property values associated with the mortgage loans “could lead to the acceptance of inflated appraisals.”  In August 2006, a Credit Suisse manager wrote to two senior traders, “How would investors react if we say that 20 percent of the pool have values off by 15 percent?  If we are comfortable buying these loans, we should be comfortable telling investors.”

According to the DOJ, the settlement “expressly preserves” the government’s ability to bring criminal charges against Credit Suisse or any of its employees.

The settlement also does not release any individuals from “potential criminal or civil liability,” the DOJ said. 

Additionally, Credit Suisse agreed to fully cooperate with any ongoing investigations related to the conduct covered by the settlement, the DOJ said.

“Credit Suisse claimed its mortgage backed securities were sound, but in the settlement announced today the bank concedes that it knew it was peddling investments containing loans that were likely to fail,” said Principal Deputy Associate Attorney General Bill Baer. “That behavior is unacceptable. Today's $5.3 billion resolution is another step towards holding financial institutions accountable for misleading investors and the American public.”

In a statement, Credit Suisse said that it is “pleased” to put this issue in the past.

“Credit Suisse is pleased to have reached an amicable settlement that allows the bank to put this legacy matter behind it, while also protecting the interests of its clients, employees and other stakeholders,” the bank said. “We remain relentlessly focused on serving our clients and continuing our progress toward our strategic goals of being a resilient, profitable and compliant organization.”

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