FINRA Fines Deutsche Bank $7.5m for ‘Negligent’ Subprime Mortgage Bonds

The Financial Industry Regulatory Authority (FINRA) fined Deutsche Bank Securities Inc. (DB) $7.5m for “negligently misrepresenting” delinquency information on subprime mortgages underlying securities issued in 2006. “It is critically important that firms provide accurate information for their customers to use in evaluating investments,” said FINRA executive vice president James Shorris, in a statement. “Future returns on subprime securitizations are affected by mortgage holders who fail to make loan payments.” FINRA found that Deutsche misrepresented and underreported the share of delinquent mortgages in the prospectus supplements of six subprime residential mortgage-backed securities (RMBS) worth $2.2bn. Deutsche described in these supplements a method of calculating delinquencies that differed from the methods actually used at the firm. For example, FINRA found that Deutsche reported 8.75% of the loans in one MBS deal was between 30 and 59 days delinquent, corresponding to $14m in delinquent loans. The actual delinquency numbers computed under the method disclosed by Deutsche showed a significantly larger share — 24.02% — of mortgages 30-59 days delinquent, corresponding to $38.5m loans. Additionally, FINRA said that Deutsche failed to correct errors by a third-party vendor and servicers that underreported historical delinquency rates in connection with its offer and sale of 16 additional subprime RMBS deals issued in 2007. “Delinquency rates constitute material information for investors,” Shorris said. “Deutsche Bank Securities’ failure to ensure that the delinquency information was accurate is an unacceptable failure to meet this important obligation.” Write to Diana Golobay. Disclosure: the author holds no relevent investments.

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