By Stephanie K. Mann, J.D.
A settlement agreement has been reached between Ally Financial Inc. and the Office of the Special Inspector General for the Troubled Asset Relief Program for Ally’s allegedly improper subprime residential mortgage-backed securities (RMBS) in 2006 and 2007. Ally has agreed to pay $52 million in relation to 10 subprime RMBS, and the settlement resolves an investigation into alleged violations of the Financial Institutions Reform Recovery and Enforcement Act, specifically conduct related to the packaging, securitization, marketing, sale, and issuance of the RMBS.
“Ally received substantial TARP bailout funds. With this agreement, Ally acknowledges that the underwriting and diligence process was deficient in connection with the securitization of 40,000 toxic subprime mortgage loans by its subsidiaries—exactly the type of abuse that contributed to the financial crisis,” said Christy Goldsmith Romero, the Special Inspector General for the Troubled Asset Relief Program.
Penalties. Under the settlement agreement, Ally is required to pay a $52 million civil penalty and to immediately discontinue operations of its registered broker-dealer, Ally Securities, LLC, which served as the lead underwriter on the subprime RMBS at issue. The broker-dealer served as the lead underwriter on the 10 subprime RMBS offerings issued in the RASC-EMX series between 2006 and 2007. Ally Securities dedicated a specialized marketing effort to create the RASC-EMX brand, securing investors for the RMBS offerings, and directing third-party due diligence on samples of the mortgage loan pools underlying the RMBS to test whether the loans comply with disclosures made to investors in the public offering documents.
As the lead underwriter, Ally Securities recognized in 2006 and 2007 that there was a consistent trend of deterioration in the quality of the mortgage loan pools underlying the RASC-EMX Securities that stemmed from deficiencies in the subprime mortgage loan underwriting guidelines, and diligence applied to the collateral prior to securitization. All RASC-EMX Securities sustained losses as a result of underlying mortgage loans falling delinquent.
Ally response. Following the settlement announcement, Ally Financial reaffirmed its commitment to remain focused on its strategic plan to build on its strengths in digital financial services, further grow its customer and deposit bases, and continue to deliver strong earnings growth.
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