Credit Suisse and Merrill Lynch get hefty subprime RMBS fines

The Financial Industry Regulatory Authority fined Credit Suisse (CS) and Merrill Lynch for alleged misrepresentations regarding the levels of subprime delinquencies in pools of residential mortgage-backed securitizations. FINRA, an opt-in independent regulator for all securities firms doing business in the U.S., fined Credit Suisse $4.5 million and Merrill Lynch $3 million. The fine is also a penalization for inadequately supervising delinquency data. “Credit Suisse and Merrill Lynch failed to monitor and supervise the reporting of historical delinquency rates, depriving investors of information essential to assessing the profitability of mortgage-backed investments,” said Brad Bennett, FINRA Executive Vice President and Chief of Enforcement. In short, FINRA claims the two financial firms did not do a good enough job of notifying investors when subprime mortgage delinquency reports changed the results of predicted performance outcomes. In the run up to the housing bust, traditional delinquency data was used for selling subprime RMBS. So, if a financial firm marketed a 2007 subprime RMBS series, the rate of delinquencies for 2005 and 2006 subprime loans would be used, for example. FINRA found that in 2006, Credit Suisse misrepresented the historical delinquency rates for 21 subprime RMBS it underwrote and sold. “Although Credit Suisse knew of these inaccuracies, it did not sufficiently investigate the delinquency errors, inform clients who invested in these securitizations of the specific reporting discrepancies or correct the information on the website where the information was displayed,” FINRA said in a statement. FINRA found that Merrill Lynch negligently misrepresented the historical delinquency rates for 61 subprime RMBS it underwrote and sold. Merrill update its website in a timely fashion, FINRA said, but that alone did not show a reasonable responsibility to its investors. “In eight instances, the delinquencies were significant enough to affect an investor’s assessment of subsequent securitizations, as it was referenced in five subsequent RMBS investments,” FINRA said. Both firms are going to pay, FINRA said, but neither admit or deny the charges. On January 1, 2009, Merrill Lynch was acquired by Bank of America, but the firm continues to do brokerage business under its own individual broker-dealer registration. Write to Jacob Gaffney. Follow him on Twitter @JacobGaffney.