On Thursday, the Financial Industry Regulatory Authority (FINRA) imposed fines on units of Bank of America Corporation (BAC) and Credit Suisse Group (CS). The cumulative fine totaled $7.5 million.
FINRA alleged that both the companies had misrepresented delinquency data and had insufficient supervision on residential subprime mortgage securitizations (RMBS) sold to investors.
BofA’s unit Merrill Lynch would pay $3 million while Credit Suisse’s unit Credit Suisse Securities (USA) LLC will be paying $4.5 million as fines to the FINRA. However, both the companies neither accepted nor denied these charges.
Actually, during the mortgage boom, many big Wall Street banks had packaged and sold billions of dollars worth of risky mortgage-backed securities (MBS) to various local governments, pension funds and other large institutional investors. However, when the housing market collapsed in 2008, many of the borrowers were unable to pay their mortgages thus leading to the failure of many of these MBS.
The FINRA has accused Credit Suisse and BofA of not disclosing correct historical performance information for past securitizations of RMBS, which they offered to various investors.
Actually, the issuers of RMBS are required to disclose historical performance information for past securitizations in RMBS. The investors assess the value of RMBS and also determine the future probability of failure of loan holders in making mortgage payment with the help of the historical delinquency rates.
Additionally, RMBS issuers are required to divulge a specific method they have used for determining delinquencies, as there are no standard processes to calculate them. However, the FINRA also alleged that BofA and Credit Suisse failed to disclose methodology used by them to determine delinquencies.
According to the FINRA, Merrill Lynch had neglectfully distorted the historical delinquency rates for 61 RMBS it sold in 2006. However, in June 2007, after finding out the delinquency faults, it had recalculated the information and put them up on its website.
Furthermore, it also failed to place a rational system to oversee and evaluate its reporting of historical delinquency data. In 2009, BofA acquired Merrill Lynch.
In a similar case, the FINRA found that Credit Suisse had wrongly provided historical delinquency rates for 21 RMBS it sold in 2006. Moreover, though the company was aware of these mistakes it did nothing to rectify the errors and inform the investors regarding this. Also, like Merrill Lynch, the company did not have a proper mechanism to manage and update relevant data on its website.
However, FINRA has not accused Credit Suisse of causing these errors. FINRA views that these erroneous information were given to the company by an unnamed master servicer. As this particular servicer stated that the problems were solved, the company did not investigate on it own whether this was correct.
Apart from BofA and Credit Suisse, in July 2010 FINRA had fined Deutsche Bank AG (DB) $7.5 million for similar violations.
The heavy fines levied byFINRA on BofA and Credit Suisse will deter other companies from providing inaccurate information to the investors. Furthermore, it will also force the companies to properly manage and supervise the relevant data that is provided on their websites.
Currently, the shares of BofA retain a Zacks #4 Rank, which translates into a short-term Sell rating while Credit Suisse retains a Zacks #3 Rank, which translates into a short-term Hold rating.
BANK OF AMER CP (BAC): Free Stock Analysis Report
CREDIT SUISSE (CS): Free Stock Analysis Report
DEUTSCHE BK AG (DB): Free Stock Analysis Report
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