The Financial Industry Regulatory Authority (FINRA) fined Deutsche Bank Securities $7.5 million for negligently misrepresenting delinquency data in connection with the issuance of subprime securities, the regulator said today.
FINRA claims that Deutsche negligently misrepresented and underreported the percentages of mortgages that were delinquent in the prospectus supplements of six subprime RMBS issued in 2006. Additionally, the firm failed to correct errors by a third party vendor and servicers, which allegedly underreported the historical delinquency rates of the mortgages in connection with its offer and sale of 16 other subprime MBS issued in 2007. The company also failed to create a system to supervise its reporting of required historical delinquency information, according to FINRA.
Delinquency rate data affects an investor’s ability to evaluate the fair market value, the yields on certificates, and the expected holding periods of MBS investments. Investors may take this information into consideration when determining the profitability of these securitizations and in assessing whether future returns would be disrupted by mortgage holders who fail to make payments, FINRA reported.
Deutsche underwrote subprime MBS and sold them to institutional investors during 2006 and 2007. In the prospectus supplements of six subprime securitizations (totaling approximately $2.2 billion) offered in March 2006, the company allegedly described a method of calculating delinquencies that differed from the method that it actually used.
As a result, delinquencies were underreported. FINRA cited one MBS deal where Deutsche reported that 8.75% of the loans were between 30 to 59 days delinquent, corresponding to $14 million in delinquent loans.
However, the delinquency numbers derived under the method that the firm actually used were significantly higher, with 24.02% of the loans between 30 to 59 days delinquent, corresponding to $38.5 million.
The company also negligently underreported historical delinquency rates on a website that it maintained that was referenced in prospectus materials in connection with the sale of 16 MBS, FINRA found.
Subprime MBS issuers must disclose historical performance information for prior securitizations using similar mortgage loans as collateral. This static pool information includes historical delinquency rates. It is also one of the disclosure requirements for ABS under the Securities and Exchange Commission (SEC) Regulation AB.
Deutsche learned in January 2007 that the outside vendor that it used to populate its Reg AB Web site was underreporting delinquencies because of the errors made by the servicers responsible for tracking delinquencies. The firm determined that these errors impacted 16 securitizations and provided corrected delinquency data for 13 of those deals to the vendor.
But the vendor failed to correct the data. The firm never made sure that the vendor posted the new static pool information and continued to refer investors to the inaccurate information on the Web site.
Although Deutsche could not determine the extent to which delinquency rates were underreported in the remaining three affected securitizations, the company continued to use this information without acknowledging the mistake on its Reg AB Web site.
"It is critically important that firms provide accurate information for their customers to use in evaluating investments," said James Shorris, FINRA executive vice president and acting chief of enforcement. "Future returns on subprime securitizations are affected by mortgage holders who fail to make loan payments. Delinquency rates constitute material information for investors. Deutsche Bank Securities' failure to ensure that the delinquency information was accurate is an unacceptable failure to meet this important obligation."
Deutsche neither admitted nor denied the charges, but consented to the entry of FINRA’s findings in settling this matter, according to the regulator.