The Financial Industry Regulatory Authority (FINRA) has fined Credit Suisse $4.5 million and Merrill Lynch $3 million for misrepresenting delinquency data and inadequate supervision with regards to their RMBS issuance.
According to a FINRA release, subprime RMBS issuers are required to disclose historical performance information for past securitizations containing mortgage loans similar to those in the RMBS being offered to buysiders. The historical delinquency rates play a key role for investors when they assess RMBS values and when they determine whether future returns might be disrupted by borrowers' failures to make loan payments. Since there exists various standards for calculating delinquencies, issuers need to disclose the specific method they utilized in calculating delinquencies, the FINRA said.
The FINRA found that in 2006, Credit Suisse misrepresented the historical delinquency rates for 21 subprime RMBS deals the bank underwrote and sold. Even though Credit Suisse knew of these inaccuracies, it did not fully investigate these errors, inform clients who invested in these securitizations of the specific reporting discrepancies or correct the information on the Web site where the data was made available.
The bank also failed to name or define the methodology it utilized to calculate mortgage delinquencies in five other subprime RMBS. Aside from these, Credit Suisse did not establish an adequate system to supervise the maintenance and updating of relevant disclosure on its Web site.
For six of the 21 securitizations, the delinquency errors were considerable enough to impact an investor's assessment of subsequent securitizations, as it was referenced in four subsequent RMBS investments.
In a separate case, the FINRA also found that Merrill Lynch negligently misrepresented the historical delinquency rates for 61 subprime RMBS it underwrote and sold.
But, in June 2007, after learning of the delinquency errors, the investment bank promptly recalculated the information and posted the corrected historical delinquency rates on its Web site. It also failed to establish a reasonable system to supervise and review its reporting of historical delinquency information. On January 1, 2009, Merrill acquired by Bank of America, but the firm is still engaged in brokerage business under its own individual broker-dealer registration.
In eight instances, the delinquencies were considerable enough to impact an investor's assessment of subsequent securitizations, as it was referenced in five subsequent RMBS investments.
"Firms must provide accurate information about the products they offer so that their customers can make informed investment decisions," said Brad Bennett, FINRA executive vice president and chief of enforcement. "Credit Suisse and Merrill Lynch failed to monitor and supervise the reporting of historical delinquency rates, depriving investors of information essential to assessing the profitability of mortgage-backed investments."
In settling this matter, Credit Suisse and Merrill Lynch neither admitted nor denied the charges, but both broker-dealers agreed to the entry of the FINRA's findings.
The investigations of Credit Suisse and Merrill Lynch were done by Allen D. Boyer, Andrew Kampel and Penny Rosenberg under the supervision of Susan Light, Enforcement Chief Counsel.