Coronavirus and the Next Possible Financial Crisis: Corporate Debt

As the world grapples with the health threat posed by the novel coronavirus (COVID-19), the secondary threats of the coronavirus—including economic and financial consequences—have come into clear view. Markets in the United States and the broader world tanked last week, including the worst day for the Dow Jones Industrial Average since “Black Monday,” October 19, 1987.[1] The Dow ended last week on an upswing,[2] but fell dramatically again yesterday[3] (though it is rebounding somewhat as of this morning).[4] Overall, the swift fall of both the Dow and the S&P 500 from all-time highs in February to bear territory this past week has raised concerns of a prolonged recession.[5]

The emergency rate cut by the Federal Reserve in early March received a lot of attention,[6] as did the resulting downward pressure on mortgage rates. Just over a week ago, the rate for a 30-year fixed mortgage had fallen all the way to 3.13%.[7] Yet, at the end of last week, the rate jumped back up to 3.65%.[8] Then at the beginning of this week, the Federal Reserve took even more drastic steps, cutting the benchmark interest rate all the way to zero and buying $700 billion of assets, including treasury bonds and agency residential-backed  mortgage securities.[9] The whip-saw effect of this health crisis—on the one hand, creating downward pressure on interest rates, and on the other hand, chilling the real estate market by, among other things, causing potential buyers to avoid open houses—will remain worthy of close scrutiny.

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RMBS Litigation Relating to Loans Sold Prior to 2008: Are We Finally Nearing The End?

The years since the 2007–2008 financial crisis have been marked with milestone settlements of claims against the major mortgage “aggregators” (sometimes also known as “investors” in the mortgage purchasing context), who then became “securitizers” or “sponsors” with respect to the loans that they purchased. In the years immediately following the crisis, aggregators often first faced suits (or, at the very least, threats of high-stakes suits) from government agencies and departments—such as the United States Department of Justice—and by the major GSEs (Government-Sponsored Enterprises), Fannie Mae and Freddie Mac. Even as the aggregators were attempting to resolve those suits and threatened actions, they began getting hit with claims by trustees that managed the residential mortgage-backed securitization trusts established by the aggregators/sponsors and by the monoline insurers that “wrapped” some of the trusts. These claims by the trustees and monoline insurers comprise RMBS (Residential Mortgage-Backed Securities) litigation.

RMBS plaintiffs notched a number of significant, substantial recoveries against the major aggregators. Countrywide (after having been acquired by Bank of America) was among the first to yield, reaching a seminal settlement in 2011 concerning the RMBS trusts that it had sponsored. ResCap announced in 2013 that it had reached a settlement agreement allowing recovery on $8.7 billion in claims. JPMorgan Chase and its affiliates, including Bear Stearns, reached an agreement in principle to settle their RMBS exposure for approximately $4.5 billion in 2013. Citibank resolved similar claims in 2014. Lehman Brothers Holdings Inc. (LBHI) reached a final settlement of the RMBS-related claims against it in early 2018.

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With Consumer Protection Class Actions On the Rise, Is the Financial Services Industry in the Crosshairs?

Lawyers or business people who feel they have been hearing about a lot more consumer protection class actions lately have good reason for that feeling. A recent report by Lex Machina, part of LexisNexis, highlights an extraordinary increase in federal consumer protection class actions over the last decade. The number of such class actions almost tripled, even though consumer protection suits generally (i.e., suits other than class actions) increased by less than 20% over the period studied, 2009 through 2018. The number of class action filings focused on consumer protection issues rose from 1,223 in 2009 to 3,382 in 2018. Though 2019 filings have not been compiled and verified as of this time, observers widely expect a number similar to, or larger than, 2018.

In its “Consumer Protection Litigation Report,” Lex Machina noted that cases involving data privacy issues and unwanted text messages were most responsible for the increase. Plaintiffs’ attorneys evidently perceive the potential for substantial company liability in data breach cases. At the same time, consumers and regulators alike are communicating higher expectations for companies’ data security systems and privacy measures. Regulators, in particular, are increasing the pressure on companies to bolster and protect their privacy and security practices and standards. This has created an opportunity for private plaintiffs and their counsel. In certain circumstances, they can contend that, among other things, a company’s alleged failure to conform to “accepted best practices” (as manifested, perhaps, in statutes like the much-discussed California Consumer Privacy Act) contributed to the injuries suffered by the putative class.

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Appellate Court Tells CitiMortgage It Can’t Force “Repurchase” Of What No Longer Exists

A recent decision by the United States Court of Appeals for the Eighth Circuit offers some vindication for mortgage companies still facing “repurchase” demands made by the banks to which they sold residential mortgages in the years leading up to the financial crisis that began in 2007 and accelerated in 2008.  In CitiMortgage, Inc. v. Equity Bank, N.A., No. 18-1312 (8th Cir. 2019), the Eighth Circuit (which has appellate jurisdiction over the federal district courts of Arkansas, Iowa, Minnesota, Missouri, Nebraska, and the Dakotas) reached the common-sense conclusion that a plaintiff cannot require a defendant loan originator/seller to “repurchase” a loan extinguished by foreclosure.  In such a circumstance, the court reasoned, there simply is nothing left to repurchase.  In so holding, the Eighth Circuit affirmed the judgment of the United States District Court for the Eastern District of Missouri  — a court that, despite being CitiMortgage’s consistently chosen forum for repurchase and contractual indemnification claims against loan sellers, had granted summary judgment to the defendant, Equity Bank, on this issue.

The relevant factual background is as follows. CitiMortgage filed suit against Equity, demanding that Equity repurchase 12 residential mortgage loans. CitiMortgage had notified Equity that it needed to take action under the cure-or-purchase provision in the parties’ Agreement.  The Eighth Circuit affirmed the district court’s holding that Equity’s duty to repurchase was limited to the six loans that had not gone through foreclosure. For the loans that had not gone through foreclosure, the court affirmed the district court’s holding that Equity breached the Agreement. The court rejected Equity’s claims that CitiMortgage’s letters lacked the necessary detail to trigger its duty to perform, and that CitiMortgage waited too long to exercise its rights. But, as to the six loans that had gone through foreclosure, the court affirmed the district court’s holding that Equity owed nothing to CitiMortgage.

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Eleventh Circuit Holds that a Guarantor Lacks Standing Under the Equal Credit Opportunity Act

Late last month, the U.S. Court of Appeals for the Eleventh Circuit held in Regions Bank v. Legal Outsource PA, No. 17-11736, 2019 WL 4051703 (11th Cir. Aug 28, 2019), that a loan guarantor does not qualify as an “applicant” for purposes of asserting claims under the Equal Credit Opportunity Act, 15 USC § 1691.

The Equal Credit Opportunity Act (“ECOA”) makes it “unlawful for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction” on the basis of “race, color, religion, national origin, sex or marital status or age[.]” In Regions Bank, a husband and wife claimed that Regions discriminated against them on the basis of their marital status, by forcing each member of the couple and the husband’s business to guarantee a loan made to the wife’s business. Regions Bank, 2019 WL 4051703, at *1.

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Jurisdictional Lessons from Mt. Gox Cryptocurrency Litigation

Last week, on the heels of a significant decline in Bitcoin prices, Forbes reported that China’s Central Bank is set to launch the world’s first state-backed cryptocurrency. The cryptocurrency will be made available initially to seven of China’s largest financial institutions, including three banks and two financial technology companies (including Alibaba).  It is planned to eventually reach the virtual wallets of U.S. consumers, through relationships with Western correspondent banks.

Meanwhile, in the United States, litigation rages on against Mark Karpeles, the President and CEO of Mt. Gox. Formerly the world’s leading bitcoin exchange platform, Mt. Gox filed for bankruptcy protection in Japan in 2014 amidst reports of rampant security breaches and refusal by its Japanese banking partner, Mizuho Bank, to process withdrawals for Mt. Gox users. Before its bankruptcy, Mt. Gox announced that 850,000 bitcoins valued at more than $450 million had gone “missing,” likely due to cyber theft.

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CFPB Decision on “GSE Patch” Revives Debate About Prudent Underwriting

The Consumer Financial Protection Bureau (CFPB) recently announced that it will allow the so-called “GSE patch” to expire in January 2021.[1] This patch permits Government-Sponsored Entities Fannie Mae and Freddie Mac to buy loans even though the borrower’s debt-to-income (“DTI”) ratio exceeds the standard limit of 43%.[2]

The CFPB’s decision revives a long-standing debate about what constitutes a creditworthy loan. By eliminating the patch, the DTI ratio of 43% will become an absolute rule, making any loans with higher DTI’s ineligible for GSE funding.[3]

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From RMBS to SLABS: Is History Repeating Itself?

popping bubbleThe fallout from the last financial crisis and recession is far from over. More than a decade after the demise of Lehman and Bear Stearns, among others, litigation continues related to alleged deficiencies in mortgage loans securitized as part of residential mortgage-backed securities (RMBS) offerings. Our firm thus remains extremely busy with, for example, defense of mortgage loan originators and brokers sued for purported breaches of contractual indemnification provisions and representations and warranties — regarding loans sold prior to 2008. Continue Reading

New Second Circuit Statute of Limitations Ruling A Benefit to Loan Originators, Brokers

protectionAs originators and brokers of mortgage loans continue to get served with new lawsuits (or threatened with potential suits) related to loans that they conveyed to aggregators prior to the financial crisis of 2008, questions almost inevitably arise as to how this is even possible: aren’t such claims time-barred under the applicable statute of limitations? The answer is more complicated than the originator or broker might have initially thought. It can depend on what state’s law applies under the pertinent contract, for example. For many judges, it can also depend on whether the aggregator plaintiff characterizes its claim as one for “indemnification,” rather than “breach of contract” or “repurchase.” Continue Reading

New York High Court Rules on Statute of Limitations

RMBSOver the last several years, we have posted several times about whether the statute of limitations bars remedies against lenders (and sometimes sponsors and trustees) of residential mortgages. (See here, here, and here). One of the most important cases in this area has been ACE Sec. Corp., Home Equity Loan Trust, Series 2006–SL2 v. DB Structured Prods., Inc.[1]

We had discussed the intermediate appellate court decision in ACE in 2013. In 2015, the New York Court of Appeals affirmed the intermediate court, holding “that a cause of action for breach of representations and warranties contained within a residential mortgage-backed securities contract accrued when the contract was executed because the representations and warranties were breached if at all, on that date.”[2] Continue Reading


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