The Financial Industry Regulatory Authority announced Wednesday it fined Deutsche Bank Securities Inc. $7.5 million for negligently misrepresenting delinquency data in connection with the issuance of subprime securities.
FINRA found that Deutsche Bank Securities "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 regulator said that the firm also failed to correct errors by a third party vendor and servicer, which underreported the historical delinquency rates of the mortgages in connection with its offer and sale of 16 additional subprime MBS issued in 2007. It also alleged that Deutsche Bank Securities failed to establish a system to supervise its reporting of required historical delinquency information.
"It is critically important that firms provide accurate information for their customers to use in evaluating investments," James S. Shorris, FINRA executive vice president and acting chief of enforcement, said in a press release. "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."
During 2006 and 2007, Deutsche Bank Securities underwrote subprime MBS and sold them to institutional investors. FINRA found that in the prospectus supplements of six subprime securitizations worth approximately $2.2 billion offered in March 2006, the firm described a method of calculating delinquencies that was in fact different from the method it actually used.As a result, delinquencies were underreported.
For example, in one mortgage-backed securities deal, Deutsche Bank Securities reported that under its described method of calculation, 8.75% of the loans were between 30-59 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.
FINRA also found Deutsche Bank Securities negligently underreported historical delinquency rates on a website the firm maintained that was referenced in prospectus materials in connection with the sale of 16 mortgage-backed securities.