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From Securities Regulation Daily, November 19, 2013

JPMorgan settles RMBS charges for $13B

By John M. Pachkowski, J.D.

The Justice Department has announced its long-rumored $13 billion settlement with JPMorgan Chase & Co. (JPMorgan) that will resolve federal and state civil claims arising out of the packaging, marketing, sale, and issuance of residential mortgage-backed securities (RMBS) by JPMorgan, Bear Stearns, and Washington Mutual prior to January 1, 2009.

Acknowledging wrongdoing. According to a statement of facts that will accompany the settlement, JPMorgan acknowledged that it regularly represented to RMBS investors that the mortgage loans in various securities complied with underwriting guidelines. However, the statement of facts noted that on a number of occasions, JPMorgan employees knew that the loans in question were not compliant with those guidelines and were not otherwise appropriate for securitization, but they allowed the loans to be securitized—and those securities to be sold—without disclosing this information to investors.

In its announcement of the settlement, the Justice Department noted that JPMorgan or its employees may still face possible criminal charges.

Of the $13 billion settlement, $9 billion will be paid to settle the federal and state civil claims by various entities related to RMBS.

The $9 billion is further broken down as follows:

  • $2 billion as a civil penalty to settle the Justice Department claims under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA);

  • $1.4 billion to settle federal and state securities claims by the National Credit Union Administration;

  • $515.4 million to settle federal and state securities claims by the Federal Deposit Insurance Corporation;

  • $4 billion to settle federal and state claims by the Federal Housing Finance Agency;

  • $298.9 million to settle claims by the State of California;

  • $19.7 million to settle claims by the State of Delaware;

  • $100 million to settle claims by the State of Illinois;

  • $34.4 million to settle claims by the Commonwealth of Massachusetts; and

  • $613.8 million to settle claims by the State of New York.

Consumer relief. The remaining $4 billion of the settlement will be used to provide relief to consumers harmed by the conduct of JPMorgan, Bear Stearns, and Washington Mutual. The consumer relief will take various forms, including principal forgiveness, loan modification, targeted originations, and efforts to reduce blight.

An independent monitor will be appointed to determine whether JPMorgan is satisfying its obligations. If it is determined that JPMorgan has not satisfied terms of the agreement by December 31, 2017, it must pay liquidated damages in the amount of the shortfall to NeighborWorks America, a non-profit organization and leader in providing affordable housing and facilitating community development.

Not above the law. Commenting on the settlement, Attorney General Eric Holder noted that “Without a doubt, the conduct uncovered in this investigation helped sow the seeds of the mortgage meltdown. JPMorgan was not the only financial institution during this period to knowingly bundle toxic loans and sell them to unsuspecting investors, but that is no excuse for the firm’s behavior. The size and scope of this resolution should send a clear signal that the Justice Department’s financial fraud investigations are far from over. No firm, no matter how profitable, is above the law, and the passage of time is no shield from accountability. I want to personally thank the RMBS Working Group for its tireless work not only in this case, but also in the investigations that remain ongoing.”

It should be noted that Holder came under fire earlier in the year when he alluded to the notion that some banks were “too big to jail.”

Accountability. “Through this $13 billion resolution, we are demanding accountability and requiring remediation from those who helped create a financial storm that devastated millions of Americans,” said Associate Attorney General Tony West. “The conduct JPMorgan has acknowledged—packaging risky home loans into securities, then selling them without disclosing their low quality to investors—contributed to the wreckage of the financial crisis. By requiring JPMorgan both to pay the largest FIRREA penalty in history and provide needed consumer relief to areas hardest hit by the financial crisis, we rectify some of that harm today.”

Pension funds reimbursed. California Attorney General Kamala D. Harris added, “JP Morgan Chase profited by giving California’s pension funds incomplete information about mortgage investments. This settlement returns the money to California’s pension funds that JP Morgan wrongfully took from them.”

Significant recovery. FDIC Chair Martin J. Gruenberg said, “The settlement announced today will provide a significant recovery for the six FDIC receiverships. It also fully protects the FDIC from indemnification claims out of this settlement. The FDIC will continue to pursue litigation where necessary in order to recover as much as possible for FDIC receiverships, money that is ultimately returned to the Deposit Insurance Fund, uninsured depositors and creditors of failed banks.” The FDIC noted that JPMorgan agreed to waive any claims for indemnification from the FDIC in its corporate capacity or its capacity as receiver for the failed Washington Mutual Bank. Finally, the FDIC’s settlement funds will be distributed among the receiverships for the failed Citizens National Bank, Strategic Capital Bank, Colonial Bank, Guaranty Bank, Irwin Union Bank and Trust Company, and United Western Bank.

Cooperative effort. Massachusetts Attorney General Martha Coakley added, “This settlement today is part of our ongoing effort to hold Wall Street accountable for its role in the financial crisis. This is the fifth case that Massachusetts has resolved since 2009 around the securitization of unfair mortgage loans. We are pleased that other enforcement agencies are coming together in a cooperative effort to clean up this mess and help prevent a repeat of the foreclosure crisis.”

Long-overdue relief. New York Attorney General Eric T. Schneiderman said, “This historic deal, which will bring long-overdue relief to homeowners around the country and across New York, is exactly what [the RMBS Working Group] was created to do. We refused to allow systemic frauds that harmed so many New York homeowners and investors to simply be forgotten, and as a result we’ve won a major victory today in the fight to hold those who caused the financial crisis accountable.”

Holding responsible parties accountable. National Credit Union Administration Board Chair Debbie Matz said, “This resolution, combined with the $335 million already recovered, will enable NCUA to greatly reduce the assessments that all credit unions have to pay.” She added, “All this really comes down to holding responsible parties accountable. In agreeing to this settlement, the world’s largest bank has taken a measure of responsibility for actions that caused severe damage to the credit union system. NCUA remains committed to fulfilling our statutory responsibilities to protect the credit union system by pursuing further recoveries against other Wall Street investment firms on behalf of credit unions and their members.”

Finally, JPMorgan chair and CEO, Jamie Dimon, commented, “We are pleased to have concluded this extensive agreement with the President's RMBS Working Group and to have resolved the civil claims of the Department of Justice and others. Today's settlement covers a very significant portion of legacy mortgage-backed securities-related issues for JPMorgan Chase, as well as Bear Stearns and Washington Mutual.”

Offer to RMBS trustees. Separately, JPMorgan said in a Form 8-K filed with the SEC yesterday that it had agreed with 21 institutional investors to offer to pay $4.5 billion to settle claims by the trustees of 330 RMBS trusts issued by the bank and Bear Stearns between 2005 and 2008. JPMorgan acquired Bear Stearns during the financial crisis. Related claims about trusts issued by Washington Mutual, also acquired by JPMorgan during the financial crisis, are not part of the settlement.

JPMorgan said in a press release filed as an exhibit to its Form 8-K that the institutional investors will back the settlement, and they urged the trustees to do the same. The $4.5 billion payment would resolve representation and warranty and servicing claims against the bank, but the final amount may be reduced if the claimants get offsetting payments. JPMorgan also agreed to change how its services mortgage loans in its RMBS trusts. The trustees have until January 15, 2014 to approve the deal.

According to JPMorgan, the RMBS trust settlement would bring an end to one more of its “legacy related RMBS matters.” JPMorgan also said that it has enough reserves to handle outstanding RMBS claims.

Companies: Bear Stearns; JPMorgan Chase; Washington Mutual; NeighborWorks America; Citizens National Bank; Strategic Capital Bank; Colonial Bank; Guaranty Bank; Irwin Union Bank and Trust Company; United Western Bank

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