Deutsche Bank Securities Fined for Bad Data on Mortgage Payments
July 21, 2010
Deutsche Bank Securities has been slapped with a $7.5 million fine by the Financial Industry Regulatory Authority (FINRA) for issuing the wrong delinquency data in connection with the issuance of subprime mortgage-based securities, the regulator said Wednesday.
In settling this matter involving poor data management and disclosure policies, Deutsche Bank Securities neither admitted nor denied the charges, but consented to the entry of FINRA's findings.
In its ruling, FINRA said that Deutsche Bank Securities negligently misrepresented and underreported the percentages of mortgages that were delinquent in the prospectus supplements of six subprime residential mortgage backed securities (MBS) issued in 2006.
The firm also failed to correct errors by a vendor and service providers, which underreported the historical delinquency rates of the mortgages in connection with its offer and sale of 16 additional subprime mortgage-based securities, issued in 2007. Deutsche Bank Securities also failed to establish a system to supervise its reporting of required historical delinquency information, FINRA said.
"It is critically important that firms provide accurate information for their customers to use in evaluating investments," said James S. Shorris, FINRA’s executive vice president and acting chief of enforcement, in a statement issued by the regulator Wednesday. "Future returns on subprime securitizations are affected by mortgage holders who fail to make loan payments. Delinquency rates constitute material information for investors. Deutsche Bank Securities' failure to ensure that the delinquency information was accurate is an unacceptable failure to meet this important obligation."
Delinquency rates are important for MBS investors to know because it affects their ability to evaluate the fair market value, the yields on the certificates and the anticipated holding periods of each of these securitizations. Investors may also consider this information in assessing the profitability of these securitizations and in determining whether future returns would be disrupted by mortgage holders who fail to make loan payments.
Issuers of subprime MBS are required to disclose historical performance information for prior securitizations that contain similar mortgage loans as collateral. That information, which includes historical delinquency rates, is called "static pool" information - and it is one of the disclosure requirements for asset-backed securities under the Securities and Exchange Commission (SEC) Regulation AB. After Regulation AB became effective in December 2005, Deutsche Bank Securities prospectus supplements for new subprime MBS offerings informed investors they could view static pool information on the firm's Regulation AB website.
In January 2007, Deutsche Bank Securities learned that the external vendor it retained to populate its Regulation AB website was underreporting delinquencies as a result of errors made by the servicers responsible for tracking delinquencies.
While the firm determined that the errors affected 16 securitizations and was able to provide corrected delinquency data for 13 of them to the vendor, Deutsche Bank Securities never ensured that the vendor posted the corrected static pool information and continued to refer investors to the inaccurate information about these 13 securitizations on the Regulation AB website.
Deutsche Bank Securities was not able to determine the extent to which delinquency rates were underreported in the remaining three affected securitizations. Even so, the firm continued to use this data without indicating on its Regulation AB website that the information was inaccurate, according to FINRA.
