Deutsche Bank Securities Hit With $7.5M For Misrepresentation
The Financial Industry Regulatory Authority (FINRA) has levied a $7.5 million fine against Deutsche Bank Securities for allegedly misrepresenting delinquency data in connection with the issuance of certain high-risk mortgage-backed securities.
FINRA announced the fine on July 21. According to the regulator, Deutsche Bank negligently misrepresented and underreported the percentages of mortgages that were delinquent in the prospectus supplements of six subprime residential mortgage-backed securities issued in 2006. The firm also failed to correct errors by a third-party vendor and servicers, which underreported the historical delinquency rates of the mortgages in connection with its offer and sale of 16 additional subprime MBS issued in 2007.
FINRA says that Deutsche Bank further failed to establish a system to supervise its reporting of required historical delinquency information.
Delinquency rates constitute material information for MBS investments because that data affects an investor’s ability to accurately evaluate the fair market value, the yields on the certificates and the anticipated holding periods of each of the securitizations. Just as important, investors may use the information to assess the profitability of the securitizations and to determine whether future returns might be disrupted by mortgage holders who fail to make loan payments.
During 2006 and 2007, Deutsche Bank Securities underwrote subprime MBS and sold them to institutional investors. In the prospectus supplements of six subprime securitizations worth approximately $2.2 billion offered in March 2006, FINRA found that Deutsche Bank Securities described a method of calculating delinquencies that was, in fact, different from the method it actually used.
As a result, delinquencies were underreported. In one MBS deal, Deutsche Bank Securities reported that under its described method of calculation, 8.75% of the loans were between 30 to 59 days delinquent, corresponding to $14 million in delinquent loans. But the actual delinquency numbers computed under the method Deutsche Bank Securities disclosed were significantly higher, with 24.02% of the loans between 30 to 59 days delinquent, corresponding to $38.5 million in delinquent loans.
In settling this matter, Deutsche Bank Securities neither admitted nor denied the charges, but consented to FINRA’s findings.