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From Banking and Finance Law Daily, April 11, 2016

Goldman Sachs settles RMBS claims for $5.06 billion

By John M. Pachkowski, J.D.

The Justice Department, along with federal and state partners, announced, on April 11, 2016, a $5.06 billion settlement with Goldman Sachs related to Goldman’s conduct in the packaging, securitization, marketing, sale, and issuance of residential mortgage-backed securities (RMBS) between 2005 and 2007. The settlement was negotiated through the Residential Mortgage-Backed Securities Working Group, a joint state and federal working group formed in 2012 to share resources and continue investigating wrongdoing in the mortgage-backed securities market prior to the financial crisis.

Civil penalty. Under the terms of the settlement, Goldman Sachs will pay a $2.385 billion civil penalty under the Financial Institutions Reform, Recovery and Enforcement Act. An additional $875 million will be paid by Goldman Sachs to settle claims filed by the National Credit Union Administration, the States of California, Illinois, and New York, as well as the Federal Loan Bank of Chicago and Federal Home Loan Bank of Seattle. The Federal Home Loan Bank of Des Moines is the successor-in-interest to the Federal Home Loan Bank of Seattle.

The NCUA as liquidating agent for three corporate credit unions—U.S. Central Federal Credit Union, Western Corporate Federal Credit Union, and Southwest Corporate Federal Credit Union—filed two lawsuits against Goldman Sachs for losses incurred as a result of the purchases of the faulty securities by the corporate credit unions, which later failed.

Lawsuits by the two Federal Home Loan Banks alleged violations of state securities laws in connection with private-label RMBS issued, underwritten, and/or sold by Goldman Sachs and purchased by the Banks.

The lawsuits by California, Illinois, and New York alleged state law violations in connection with the marketing, structuring, arrangement, underwriting, issuance, and sale of RMBS by Goldman Sachs.

Consumer relief. The remainder of the $5.06 billion accounts for $1.8 billion to address consumer relief "to remediate harms resulting from alleged unlawful conduct of Goldman Sachs." An Annex to the settlement provides that consumer relief will address, among other things, debt restructuring, first-lien principal reduction, and the creation of affordable and for-sale housing. An independent monitor will determine whether Goldman Sachs has satisfied the obligations contained in Consumer Relief Annex.

Statement of Facts. Finally, the settlement includes an agreed-upon Statement of Facts that describes how Goldman Sachs made multiple representations to RMBS investors about the quality of the mortgage loans it securitized and sold to investors, its process for screening out questionable loans, and its process for qualifying loan originators.

Accountability. Commenting on the settlement, Acting Associate Attorney General Stuart F. Delery stated, "This resolution holds Goldman Sachs accountable for its serious misconduct in falsely assuring investors that securities it sold were backed by sound mortgages, when it knew that they were full of mortgages that were likely to fail. This $5 billion settlement includes a $1.8 billion commitment to help repair the damage to homeowners and communities that Goldman acknowledges resulted from its conduct, and it makes clear that no institution may inflict this type of harm on investors and the American public without serious consequences."

"Number one priority". New York Attorney General Eric T. Schneiderman said, "Since 2012, my number one priority has been getting New Yorkers the resources they need to rebuild. These dollars will immediately go to work funding proven programs and services to help New Yorkers keep their homes and rebuild their communities. We’ve witnessed the incredible impact these programs and services can have in helping communities recover from the financial crisis. This settlement, like those before it, ensures that these critical programs—such as mortgage assistance, principal forgiveness, and code enforcement—will continue to get funded well into the future, and will be paid for by the institutions responsible for the financial crisis."

Fulfilling statutory responsibilities. Finally, NCUA Chairman Debbie Matz noted, "Credit unions are benefitting from an aggressive litigation strategy NCUA continues to follow in order to hold responsible parties accountable. NCUA remains committed to fulfilling its statutory responsibilities to protect the credit union system and to pursuing recoveries against Wall Street firms that contributed to the corporate crisis. Our goal is to minimize net losses of the corporate crisis and provide a future rebate to credit unions."

Companies: Federal Home Loan Bank of Chicago; Federal Home Loan Bank of Des Moines; Federal Home Loan Bank of Seattle; Goldman Sachs; Southwest Corporate Federal Credit Union; U.S. Central Federal Credit Union; Western Corporate Federal Credit Union

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