From Manal Mehta of Sunesis Capital
MUST MUST READ FRAUD-NOTABLE QUOTABLES FROM MBIA VS. CREDIT SUISSE AMENDED COMPLAINT-“shady as fck,” “Utter complete garbage” “what does our loan conduit and the Titanic have in common?” “both sleep with the fish.” “no matter how shi*ty production is…”
Transcript after the jump
2. As discovery in this case thus far demonstrates, in this final role, Credit Suisse wantonly violated the norms of legitimate business practice to induce MBIA to enter into the Insurance Agreement and issue the Policy. It knowingly made material misrepresentations to MBIA, and provided false warranties, to induce MBIA to issue the Policy. These false representations and warranties concerned, primarily, the attributes of the Loans and the manner in which Credit Suisse’s loan conduit operations originated, acquired, and reviewed them. Credit Suisse knew, but did not disclose to MBIA, that the collateral pool was replete with defective Loans, including hundreds of Loans that Credit Suisse already had attempted to return to the originators prior to the transaction with MBIA. Credit Suisse knew, but did not disclose to MBIA, that originators from which it was acquiring Loans were, for example, – in the words of Credit Suisse executives – “shady as fck,” [sic] would “try to get away with anything they c[ould],” and were selling to Credit Suisse “complete garbage. Utter complete garbage.” And Credit Suisse knew but did not disclose that its loan operations were a farce, internally mocked by its own executives. Indeed, in April 2007, just weeks before the Policy issued, a Credit Suisse managing director joked to the senior executive responsible for Credit Suisse’s mortgage loan conduit business, “what does our loan conduit and the Titanic have in common?” Five minutes later, the senior executive responded, “both sleep with the fish.” Other Credit Suisse executives discussed their knowledge that Credit Suisse’s practices encouraged loan sellers “to continue delivering us crap,” which loans were then acquired and securitized by Credit Suisse “no matter how shitty production is and no matter how bad performance is.”
3. In addition to acting as the sponsor, underwriter and servicer for the Transaction, Credit Suisse was the originator of 34.4% of the securitized Loans and provided financing to originators accounting for at least one-third of the securitized Loans. Credit Suisse consequently had intimate knowledge of the Loans and the protocols pursuant to which they were originated, acquired, reviewed and selected for
securitization. The depth of Credit Suisse’s actual knowledge and view of the Loans, and the flaws in its loan conduit operations, is only now coming to light from discovery in this matter. That information includes admissions from Credit Suisse’s own files and the sworn testimony of former Credit Suisse underwriters, “client advocates” and “due diligence” providers (the “Confidential Witnesses” or “CW1” to “CW10”). The truth differs markedly from the specific representations made by Credit Suisse to MBIA to secure the Policy.
Of the nearly $1 billion in second-lien Loans that Credit Suisse provided as collateral for the securities, more than 66% of the original loan balance have been charged off as of the date of this Amended Complaint, requiring claims payments by MBIA of more than $386 million under the Policy.
In a review of 1,798 Loans drawn from the Transaction, MBIA discovered that nearly 85% of the Loans did not meet the specific representations and warranties made by Credit Suisse with respect to the Loan attributes. Moreover, as discussed in more detail herein, discovery to date confirms that this high breach rate was not mere happenstance, but the result of deliberate disregard by Credit Suisse of the protocols it represented it had implemented to ensure the loans it originated and acquired adhered to underwriting guidelines.
The Confidential Witnesses have testified, for example, that contrary to Credit Suisse’s representations that it maintained separate sales and credit/underwriting operations, Credit Suisse sales account executives routinely interfered with the underwriting, due diligence and credit and compliance operations, directing the approval or acquisition of loans that did not meet underwriting guidelines or were procured through borrower or broker fraud. When reviewers identified loans that did not meet underwriting guidelines, Credit Suisse systematically overrode those findings, under the façade of “business decisions”, and deemed the loans compliant, or directed its contractors to do so, in order to perpetuate the flow of Loans, even knowing that they did not meet guidelines. In other words, the underwriting and due diligence performed by Credit Suisse was not intended to identify defects in the loans and thus prevent them from being securitized, but rather to create a façade of diligence that would conceal defects and churn the resulting defective loans through Credit Suisse’s securitization machine.
10. Credit Suisse internal emails, obtained through disclosure, reflect the corrupt nature of its internal due diligence and “exceptions” review processes. The emails corroborate Confidential Witness testimony, demonstrating that contracted due diligence reviewers notified Credit Suisse of underwriting and origination defects in Loans they were reviewing – including evidence of borrower and/or origination fraud in the form of unreasonable overstated incomes – but that Credit Suisse executives, including trading desk executives, directed the acquisition of the loans in spite of the known defects.
11. Credit Suisse’s documents further reveal that its executives knew that Credit Suisse’s due diligence operations were deficient, but did not address the failings. Moreover, contrary to its representation to MBIA, Credit Suisse did not in fact conduct due diligence on all the Loans, and indeed conducted no independent due diligence review of the Loans acquired through its wholesale channel. Significantly, Credit Suisse’s records show that it conducted substantially less than 100% due diligence on Loans originated by New Century Mortgage Corporation (“New Century”), an originator that had filed for bankruptcy protection. As Credit Suisse acknowledged in the Transaction Prospectus, the New Century Loans therefore were more susceptible to deviations from underwriting guidelines. Thus, it was particularly important that Credit Suisse conduct the 100% due diligence review of New Century Loans, and particularly egregious that it did not.
12. Moreover, discovery has shown that Credit Suisse’s actual practices directly contravened its represented commitment to conduct quality assurance reviews aimed at identifying defective Loans, to provide prompt notice of defective Loans to the Trust and to MBIA, and to repurchase from the Trust any defective Loans. First, Credit Suisse adopted an undisclosed policy to repurchase defective loans from securitizations only to the extent Credit Suisse was “simultaneously selling them back to the originator.” This concealed policy not to repurchase breaching loans unless it could simultaneously sell the loans back to the originator was not a valid condition or limitation on its compliance with its repurchase obligation, and the concealed intent to not repurchase all defective loans was fraudulent, in light of Credit Suisse’s affirmative representation of intent to assure repurchases.
13. Second, the Credit Suisse trading desk instructed Credit Suisse’s quality control reviewers to “avoid the previous [quality control] approach by which a lot of loans were qc’d regardless of opportunity for put-back … creating a record of possible rep/warrant breaches in deals.” Instead of performing quality control, as represented, to identify individual loan defects and patterns of deficiencies, Credit Suisse manipulated its quality control review of loans to try to avoid identifying facts and defects that would trigger its repurchase obligations from securitizations.
14. Third, Credit Suisse routinely (i) made repurchase demands against originators for defective loans Credit Suisse identified, many of which it had already, or subsequently, sold into securitizations, (ii) settled those repurchase demands and (iii) incredibly, rather than contribute the proceeds of such repurchases to the securitization trusts where the loans resided, pocketed the recoveries without providing any notice to the trusts. These practices allowed Credit Suisse to circumvent its own repurchase obligations and obtain millions in incremental revenue to fund the bonuses of its trading desk, leaving the securitizations – and here, MBIA – to bear the losses.
15. Credit Suisse followed these concealed and misrepresented underwriting, due diligence, quality control, and repurchase practices at the time it originated, acquired, and securitized the Loans in the Transaction. As its documents confirm, at the time Credit Suisse made its representations to MBIA about the Loans and its business operations, Credit Suisse knew, but did not disclose to MBIA, that it had obtained quality control results showing that hundreds of the securitized Loans breached the representations and warranties that Credit Suisse made to MBIA, and had concluded that the Loans were non-compliant with applicable underwriting guidelines and origination standards. Credit Suisse also had already issued repurchase demands to the loan originators on more than five hundred Loans that it thereafter securitized in the Transaction. In the words of a senior Credit Suisse executive, by early 2007 Credit Suisse “already knew” that it had “systemic problems in … compliance and credit.” At the same time, Credit Suisse was inducing MBIA to participate in the Transaction with its specific representations concerning, among other things, its “[d]isciplined origination and purchase strategy. “
16. With respect to Loans that Credit Suisse acquired from New Century, moreover, at the time of the Transaction Credit Suisse already had issued more than 200 repurchase demands with respect to Loans originated by New Century, which Loans Credit Suisse then securitized into the Transaction. Contemporaneous with its repurchase demands on New Century, as of March 2, 2007 – one month before including those Loans in the Transaction – Credit Suisse had extended to New Century a $1.3 billion warehouse credit line to finance the origination of loans. Credit Suisse thus fraudulently concealed from MBIA known facts that the New Century loans it securitized in the Transaction did not comply with its representations and warranties, while issuing a partial and misleading general disclaimer about prospective risks in the Prospectus Supplement. Moreover, by means of its extension of warehouse financing to New Century and other warehouse lenders who provided Loans to the Transaction, Credit Suisse perpetuated its double-dipping revenue model, funding loans by the very originators against which it was making repurchase demands, and generating for itself a discount on those defective loans that it sold into securitizations at full price, without disclosing their defects.
17. Credit Suisse concealed its true practices before the close of the Transaction, and has continued to cloak its practices through discovery in this case. At the outset of this matter, and for months after the Complaint was filed, Credit Suisse took the position that it had made no repurchase demands on originators with respect to any of the Loans. Only after MBIA discovered the demands through productions made by thirdparty originators did Credit Suisse acknowledge their existence.
19. In willful disregard and frustration of its contractual covenants, Credit Suisse refused to repurchase any of the breaching Loans identified by MBIA prior to the filing of this action. Credit Suisse demonstrated its bad faith in response to MBIA’s pre-litigation inquiries about Credit Suisse’s repurchase of defective loans. Prior to bringing this lawsuit, MBIA requested that Credit Suisse provide copies of the files relating to the origination of the Loans – a right MBIA obtained at closing, pursuant to the Insurance Agreement – so that MBIA’s consultants could re-underwrite the Loans for breaches of the warranties provided at closing. Consistent with Credit Suisse’s baseless policy of “hold[ing] off on buying [breaching loans] out of the deals until [the
originators] agree to repurchase” them, the Credit Suisse managing director responsible for its trading desk told MBIA that Credit Suisse would not provide all of the loan files,
and that MBIA should just “sue Credit Suisse now.” Credit Suisse knew that if the files were reviewed, Credit Suisse would be obligated to repurchase a large number of the Loans, which it had no intention of doing voluntarily. To derail MBIA’s request, the same Credit Suisse managing director denied that Credit Suisse had possession of certain of the Loan files, a position that was proven false by Credit Suisse’s production of such files during discovery in this matter. Thereafter, and only after disclosure in this action revealed that Credit Suisse had made its own repurchase demands on sellers from which Credit Suisse acquired the Loans based on the same kinds of breaches and on some of the same Loans identified by MBIA, did Credit Suisse agree to repurchase a mere forty-nine of the thousands of defective Loans identified by MBIA.
B. Credit Suisse Financed Originators
32. In a “warehouse lending” arrangement, a bank extends a line of credit to a third-party loan originator to fund the issuance of mortgage loans. Funds can be provided by the lending bank either at the time the loan is closed and simultaneous with the completion of all loan documents (i.e. “wet funding”), or after the lending bank has had the opportunity to review the loan documents (i.e. “dry funding”). Credit Suisse engaged in both dry-funded and wet-funded warehouse lending.
33. Credit Suisse had allocated $14 billion to its warehouse lending relationships by early 2007, which encompassed warehouse lending relationships with a number of originators of loans in the Transaction, including New Century, Taylor Bean and Whitaker (“Taylor Bean”), and Alliance Bancorp, who originated, between them, approximately one-third of the securitized Loans.
34. As a condition of obtaining warehouse credit lines, these originators and others provided Credit Suisse with disclosures concerning their origination practices and procedures, including performance characteristics of loans they originated. Credit Suisse tracked the performance of its warehouse originators through a database called the Web-Promerit system, described by Credit Suisse as the “tracking system that carries out all Warehouse functionality.”
37. Notwithstanding Credit Suisse’s knowledge that its warehouse lending had facilitated the improper origination of loans, Credit Suisse continued extending warehouse credit to these originators, funding loans in reckless disregard of their improper origination practices. For example, as of March 2, 2007, Credit Suisse had extended to New Century a $1.3 billion credit facility. That same month Credit Suisse made a repurchase demand on New Century to repurchase more than 300 loans, with a principal balance of more than $20 million for early payment defaults (i.e., the failure of
the borrower to make required payments during the first few months of the origination of the loan). As Credit Suisse knew, early payment defaults or “EPDs” are red flags of improper origination, and in particular a borrower’s inability to repay a loan and/or fraud in connection with the loan origination. Credit Suisse nonetheless included in the Transaction at least 182 of the Loans submitted to New Century for repurchase.
38. Along with New Century, Credit Suisse similarly extended a $500 million warehouse credit line to Taylor Bean (which originated 1,325 loans in the Transaction), despite the fact that Credit Suisse knew Taylor Bean to be engaged in improper origination and underwriting practices, and despite the fact that Credit Suisse internally disparaged Taylor Bean’s origination practices, referring to the bank as “our amateurs.” Likewise, Credit Suisse extended a $500 million warehouse line of credit to Alliance Bancorp, which originated more than 600 loans in the Transaction, despite Credit Suisse’s knowledge that Alliance Bancorp had demonstrated failings in loan and quality control performance. Credit Suisse’s intentional or reckless extension of
warehouse credit to originators known to engage in improper origination and underwriting of loans – and its reckless acquisition and securitization of those loans – inevitably led to Credit Suisse’s origination, acquisition, and securitization of defective loans, including in the Transaction.
39. Credit Suisse took little or no action to correct the practices of its warehouse lenders, but rather exploited their improper and illegal origination practices and sought in 2007 (contemporaneous with the Transaction) to expand upon its reckless warehouse lending operations. A February 2007 flyer created by Credit Suisse for prospective warehouse lenders touted Credit Suisse as “one of the top 5 national warehouse lenders… [w]ith more than $20 billion in approved facilities;” and touted, among the “Credit Suisse advantages,” “[i]ncentive based pricing to reduce [originator] financing costs” and “[e]arly funding programs to provide you extra funding capacity for eligible collateral.”
56. More specifically, in March 2007, at the same time that Credit Suisse was soliciting the Policy from MBIA with representations about the integrity of its seller certification and monitoring protocols, a Credit Suisse executive directly involved with negotiations between Credit Suisse and MBIA, Credit Suisse’s Director of Second Loan Trading, internally identified problems with four sellers – Resource Bank, Meridias Bank, Wall Street Mortgage Bankers, and New York Mortgage Company – who together originated approximately 750 of the loans in the Transaction. He asked other Credit Suisse executives “What should we do about these sellers?” noting that Credit Suisse had a “large amount of delq loans from these [four] sellers in inventory and we still purchase loans from them.” He then proposed that Credit Suisse “cut them off or halt funding.” Credit Suisse’s Managing Director for Non-Agency Trading expressed personal familiarity with two of the originators, acknowledging the “bad performance” of Meridias Bank, and noting that Resource Bank routinely sold loans to Credit Suisse that were “complete garbage. Utter complete garbage.”
57. More broadly, however, the Managing Director for Non-Agency Trading acknowledged “the more general problem” that Credit Suisse’s “seller watch list” and monitoring practices were “completely biased” in favor of the continued acquisition and securitization of bad loans, and that Credit Suisse did not have appropriate criteria in place for terminating sellers from its watch list. Credit Suisse’s Director of Second Loan Trading inquired a week later as to whether the executives had “done anything regarding these sellers yet.” No action had been taken. Instead, the
Managing Director for Non-Agency Trading recommended that the sellers should be referred to the watch list process, which he had just described as “biased” and a “problem.”
58. Thus, with knowledge that these sellers were originating “utter, complete garbage,” Credit Suisse nonetheless intentionally or recklessly continued to securitize defective loans originated by those sellers, even though the sellers’ loans routinely failed quality control review and generated high numbers of defaults. Of the loans originated by the four sellers identified by Credit Suisse’s Director of Second Loan
Trading and securitized in the Transaction, MBIA’s litigation consultants have reunderwritten 570 and found that 430 of them (75%) breach the Loan Warranties.
60. By April 2007, the month the Transaction closed, Credit Suisse knew that as a result of its improper practices, its RMBS Business was on the precipice of failure. Credit Suisse’s RMBS Conduit managing director and Credit Suisse’s seniormost executive of its RMBS Conduit Business emailed each other about the dire state of the loans in Credit Suisse’s RMBS Conduit. “[W]hat does our loan conduit and the Titanic have in common?” one executive asked. Five minutes later, the other responded, “both sleep with the fish.”
61. Credit Suisse thus falsely and misleadingly represented to MBIA that Credit Suisse employed seller certification, evaluation, and monitoring techniques to assure the quality of the loans, and used its watch list and other tools to assure that the sellers from which Credit Suisse obtained the loans employed “appropriate standards for origination practices” and properly reflected Credit Suisse’s purported “[d]isciplined origination and purchase strategy.” Disclosure to date demonstrates that while representing that it used these tools to assure the quality of the loans it securitized, Credit Suisse did not disclose that its own executives viewed the watch list as “biased,” that Credit Suisse intended to securitize loans, in the Transaction, generated by originators
that Credit Suisse viewed as producing “utter garbage,” and that the Loans overwhelmingly came from sellers that Credit Suisse had already identified, and placed on its watch list, for systematic underwriting and origination deficiencies. Furthermore, Credit Suisse had already demanded that certain of these originators, known to be engaged in deficient origination practices, repurchase hundreds of the Loans that Credit Suisse securitized in the Transaction.
62. These misrepresentations and omissions were material to MBIA’s consideration of whether to issue the Policy. MBIA would not have issued its Policy, and no reasonable insurer would issue a policy, guaranteeing the performance of a portfolio of loans knowing that the loans overwhelmingly were originated by processes that identified and yet ignored systematic origination deficiencies. Moreover, the fact that Credit Suisse (as admitted) implemented its seller evaluation processes in a “biased” manner, and overlooked the production of “garbage” loans, would have been a material
consideration for MBIA and any reasonable insurer in deciding whether or not to rely upon the integrity of Credit Suisse’s other business practices.
69. Credit Suisse contracted out the underwriting for its self-originated wholesale loans to third-party firms (the “Underwriting Contractors”) that operated fulfillment centers where underwriting was performed. Confidential witnesses formerly employed by these firms have revealed that Credit Suisse’s wholesale loans were underwritten and approved without any meaningful review or control by Credit Suisse senior underwriters. Whereas loans that were rejected by the Underwriter Contractors were routinely reviewed, and the rejections overridden, by senior Credit Suisse
employees, loans that were approved by the Underwriting Contractors were not underwritten by Credit Suisse underwriters..
70. Credit Suisse employees only took an active role in closing its originated loans when third-party underwriters identified red flags that should have resulted in denial of the loan applications. In many of those cases, Credit Suisse employees – such as account executives, or sales managers, earning hundreds of thousands of dollars per year on commission to close loans, not senior underwriters – interceded with loan brokers and borrowers to generate fraudulent supporting materials and to pressure the Underwriting Contractors to approve and close the loans, regardless
of underwriter findings that the loans should not be approved. In other cases, Credit Suisse employees intentionally or recklessly disregarded evidence that the loan applications did not meet applicable origination and underwriting standards, and instructed the Underwriting Contractors that the defective applications “met Credit Suisse guidelines” and should be approved.
71. According to CW1, a former employee of a Credit Suisse Underwriting Contractor, Credit Suisse account executives regularly inserted themselves in the underwriting process in order to pressure Underwriting Contractors to approve defective loans for funding, and regularly advised Underwriting Contractors to accept obviously fraudulent documents, such as gift letters that appeared to be written by children and asset verification letters that were not genuine, as a basis for clearing loans. CW1 described this practice as “pervasive,” with Credit Suisse account executives
encouraging underwriters to “just sign off” on defective loans. Even more, this former employee testified in deposition that Credit Suisse permitted exceptions to the underwriting guidelines that were inappropriate in order to facilitate the closing of loans.
72. According to CW2, another former employee of an Underwriting Contractor, Credit Suisse account executives instructed him to approve loans for funding even when a borrower’s stated income was patently unreasonable. He was instructed, “you need to find a way to make it reasonable.” Other times, this witness received pressure from Credit Suisse account executives to manipulate data in the loan files that violated the applicable underwriting guidelines in order to inappropriately clear loans for closing.
73. According to yet another former employee of one of Credit Suisse’s Underwriting Contractors, CW3, Credit Suisse account executives aggressively demanded that loans be closed as quickly as possible and that conditions be cleared even when it was inappropriate to do so. This employee was often threatened by Credit Suisse account executives that Credit Suisse would pull its business if loans were not closed with the requisite speed – and that oftentimes, the requisite speed did not afford the Underwriting Contractors enough time to appropriately review and investigate the loan files.
79. The falsity of Credit Suisse’s disclosures is corroborated by the statements of a number of former employees of third-party Due Diligence Contractorshired by Credit Suisse. These confidential witnesses confirm that Credit Suisse directed Due Diligence Contractors to overlook defects in loans, to grade defective loans as nondefective, and that to the extent the Due Diligence Contractors still found defects in the loans, to identify compensating factors, which were often insufficient to overcome the defects, and to grade such loans as non-defective. Finally, to the extent loans graded as defective remained in the due diligence pool, Credit Suisse directed Due Diligence Contractors to change the grades assigned to these loans from defective to non-defective.
80. According to CW4, a former employee of a Credit Suisse Due Diligence Contractor who oversaw due diligence for that firm, most of the due diligence performed for Credit Suisse was done on a sample basis, and thus Credit Suisse did not purchase only loans approved. In fact, Credit Suisse executives manipulated due diligence samples so that the results would artificially appear clean, when Credit Suisse knew that the pools from which the samples were drawn were riddled with defective loans. On the basis of these manipulated due diligence samples, Credit Suisse then
acquired the entire pool of loans, whether or not they had been reviewed. This employee also confirmed that Credit Suisse routinely ignored evidence of fraud that her staff identified in loans that were diligenced, and that Credit Suisse sales and trading personnel routinely interfered in the diligence process. According to this witness, Credit Suisse account executives frequently called her due diligence underwriters and attempted to intimidate them into speeding up their review or approving bad loans.
81. CW5 worked at Lydian, one of the Due Diligence Contractors hired by Credit Suisse, from 2005 until the end of 2006 and reviewed many Credit Suisse loans. According to CW5, he was routinely instructed to ignore evidence of fraud in the loan files he reviewed for Credit Suisse and to refrain from reviewing stated incomes for reasonableness – his job was instead described as a “data entry review”. For example, CW5 recalled reviewing a loan where a cashier at Burger King claimed to earn $7,500 per month. Based on his experience in the mortgage industry, CW5 knew this income
was unreasonable, but such loans were graded as passing because of directives from Credit Suisse. Even more, CW5 testified that it was a pervasive practice at his due diligence firm, Lydian, to approve loans based on compensating factors that were inadequate to overcome defects in the reviewed loans. Failing grades CW5 gave to loans were inappropriately changed by Lydian higher-ups to passing.
82. CW6 also worked at Lydian from 2005 to 2006 and reviewed many Credit Suisse loans. According to CW6, even though she found evidence of fraud in the loan files she reviewed for Credit Suisse, she was instructed to overlook such red flags of default. For example, she recalled one file in particular where a paystub had the word “checking” spelled incorrectly. Despite this warning sign of fraud, CW6 was instructed to grade this and other similar loans as passing. She remembered being instructed by her supervisors not to ask questions, but rather reassured that the approval
of loans should proceed without reunderwriting. Management encouraged her to approve defective loans with such reassurances as “It’s in the file. The loan has closed. The borrower was in the home.”
83. CW6 was also instructed not to review stated incomes for reasonableness while performing due diligence for Credit Suisse. Indeed, she testified that she even received instructions passed along from Credit Suisse to assume that borrowers with unreasonable stated incomes had higher-paying jobs than those listed on their loan applications in order to justify grading such loans as passing. CW6 also testified that she was routinely instructed to use compensating factors to grade loans as passing even though these compensating factors were weak and insufficient to overcome
the defects in the loans she was reviewing. Finally, CW6 testified that Lydian higherups, working in close communication with Credit Suisse, would inappropriately change the grades she had given to loans from defective to passing.
84. CW7 worked at Lydian from 2004 to 2005 and also reviewed many Credit Suisse loans. Lydian supervisors, with the apparent authority of Credit Suisse, instructed her to fraudulently change information found in the loan files she reviewed in order to mask defects and grade problematic loans as passing. She often received instructions from her superiors to pad stated incomes and stated assets – her supervisors told her, “it’s stated, so just pad it.” CW7’s supervisors, with the apparent authority of Credit Suisse, improperly changed the grades of those loans she graded as
defective to passing.
85. Many of the confidential witnesses, including CW8-CW10, who conducted due diligence of Credit Suisse loans, were not provided with applicable underwriting guidelines when conducting their reviews. Sometimes, they were not provided with underwriting guidelines at all and were instructed by their superiors to review the loans according to “general guidelines.” Other times, they were provided with underwriting guidelines that obviously did not apply to the loans that were being reviewed (either because the guidelines were more recent than the loans’ origination date
or because they were outdated).
86. Credit Suisse’s practice of improperly overlooking known defects identified through the due diligence process is corroborated by its disclosures to date. Credit Suisse maintained a series of generic email mailboxes, including “firstname.lastname@example.org” and “fulfillment.exceptions@creditsuisse. com,” to which underwriting contractors routinely sent notice of loans, identified in the due diligence process, that did not meet underwriting guidelines and should not have been originated.
87. Credit Suisse executives, including those on its trading desk, routinely instructed its contract reviewers to overlook identified defects, and to acquire loans in spite of non-compliance with origination standards and underwriting guidelines. For instance, with respect to one of the Loans securitized in the Transaction, on Tuesday, December 12, 2006, a contract reviewer notified Credit Suisse that “[t]he borrower has been employed for 2 1/2 years as a restaurant manager with Mucho Y Rico with stated monthly income of $9000, $108,000 annually. Salary.com [a commonly-used source of geographic salary data] shows an average of $62,000 for a restaurant manager.” The contractor inquired to the “Fulfillment Exceptions” desk as to whether Credit Suisse “will accept this loan with the overstated income,” i.e., notwithstanding evidence of borrower fraud. The next day, a response came back to the contractor, from the Credit Suisse “Underwriting Questions” email box, that “u/w [underwriting] is ok with this one.” Credit Suisse’s blatant disregard for known facts that Loans were originated or acquired in violation of underwriting and origination standards, based upon, e.g., unreasonable and overstated incomes renders false its representations with respect to specific Loans, but also about its business practices, generally.
100. In an April 9, 2007 email, contemporaneous with the Transaction negotiations between Credit Suisse and MBIA, Credit Suisse’s Director of Transaction Management and Securitization discussed this new approach, directing subordinates to “avoid the previous [quality control] approach by which a lot of loans were qc’d regardless of opportunity for put-back … creating a record of possible rep/warrant breaches in deals.” Instead of performing quality control as represented, to identify individual loan defects and patterns of deficiencies, Credit Suisse manipulated its quality control review of loans to try to avoid identifying facts and defects that would concretely trigger its repurchase obligations from securitizations.
101. Additional e-mails from Credit Suisse obtained through disclosure confirm the effect of this directive to manipulate the quality control results. On June 15, 2007, the same Director sent an e-mail regarding his quality control goals: “I want to maintain an appropriate amount of true QC but avoid spending too much money and generating too many negative reports related to loans for which we have no recourse, and instead re-focus some of the QC effort on recoveries/loss mit.” In a follow-up e-mail on June 18, he again noted that for QC that month, the “sample size [was] limited so that it generate[d] meaningful feedback but avoid[ed] generating inordinate correspondence re potential loan defects that we may not repurchase from securitizations.”
102. On June 28, 2007, Credit Suisse’s director in charge of Credit Policy and Underwriting instructed instructed another Credit Suisse executive not to QC for potential fraud in loans that had suddenly failed (“went down quickly”), in furtherance of Credit Suisse’s new policy not to investigate evidence of fraud and underwriting defects. On August 1, 2007, Credit Suisse’s Director of Transaction Management and Securitization confirmed “the new ‘Loss Mit’ QC process: QC’ing delq loans with a focus on putback opportunities, as compared to ‘QC’ sourced by seller, u/w,
vendor, etc. from purchases in the prior month.”
103. Third, contrary to its representations and its policies, which required Credit Suisse to review “[l]oans reporting 90+ days delinquent, that were acquired/originated in the preceding nine months,” Credit Suisse did not conduct quality controls for loans with “red flags” of defective loans. In particular, Credit Suisse deliberately avoided quality control reunderwriting and review of loans that experienced early payment default or “EPD,” i.e., the borrower failed to make required payments during the first two to three months of the mortgage.
110. Credit Suisse’s internal documents show that it regularly discussed this practice. In discussing loans with “credit [and] underwriting deficiencies” that Credit Suisse was planning to putback to an originator, a Credit Suisse Director of Transaction Management and and Securitization (Securities/Bulk Funding) stated that Credit Suisse should “hold off on buying them out of the deals until [the originators] agree to repurchase.” A Credit Suisse Vice President agreed that the decision on whether to repurchase the defective loans from the respective trusts “would depend on whether CS will. . . ultimately bear the losses.” Another Credit Suisse Director of Transaction Management and Securitization described the policy in no uncertain terms: “As a general
rule, we don’t repurchase any delq loans from deals unless we are simultaneously selling them back to originator, unless we make a considered decision and I sign the memo.” Thus, while Credit Suisse represented to MBIA that its practice was to promptly identify and repurchase defective loans from its securitizations, its actual practices were secretly conditioned upon Credit Suisse being able to itself recover on the loan from the originator This co-head of Transaction Management and Securitization succinctly explained the rationale for Credit Suisse’s policy: “We want to keep a close eye on loans repurchased from securitizations because in the past, we were concerned that [the Putback Group] was repurchasing loans from securitizations based on [the Putback Group’s] expectation that they could put the loan back to the seller for [early payment default], and when they didn’t, we got stuck with the loan in the markdown account.”
113. Related, Credit Suisse concealed from MBIA that, upon identifying defective loans, it routinely negotiated price breaks with originators for the known defects (generally in the form of discounts on future loans to be delivered by the originator), agreeing to overlook the credit and underwriting defects in those loans. Credit Suisse’s Director of Adjustable Rate Mortgage (“ARM”) trading observed that the senior-most executive of the RMBS Conduit Business was the “king of quietly forgiving [defaults] and premium recapture and make wholes in exchange for incentive laden
forwards.” According to the Credit Suisse’s RMBS Manual, a premium recapture is a rfund given to Credit Suisse or DLJ by sellers for mortgages that were current and securitized or which qualify or securitization. A “make-whole” is a reimbursement by a seller to Credit Suisse for a loss on a loan that Credit Suisse had previously recognized. The Director of ARM Trading further observed that “[n]ot only does [this practice] encourage these guys to continue delivering us crap, but its all done on the DL,” so that the loans could be securitized without anyone noticing the defects, and without disclosure to investors or to the transaction insurers of the known problems. Credit Suisse’s Managing Director for Non-Agency Trading agreed with this assessment, noting that
Credit Suisse continued in these practices, “no matter how shitty production [was] and no matter how bad performance [was].”
114. Credit Suisse’s widespread practice of issuing repurchase demands based upon known defects in loans, but not itself repurchasing the loans from securitizations, led to its recovery of substantial fraudulent profits. Though Credit Suisse has resisted a complete production of data reflecting its repurchase recoveries, disclosure to date shows that it tracked, on a quarterly basis, its “putback and premium recapture.” In December 2007, Credit Suisse recorded year-to-date recoveries of approximately $205 million on $363 million of repurchase demands issued for loans in securitizations (including $7 million in repurchase demand recoveries on 83 loans from the Transaction). Approximately $70 million of those recoveries were applied to “straight repurchases” of loans from securitizations, and $19 million were used in prepayment of loans. Approximately $116 million was applied to various Credit Suisse trading accounts, rather than to the securitizations where the defective loans remained. Credit Suisse’s accounting for this revenue, and accordingly the financial statements it supplied to MBIA as a condition of MBIA’s willingness to issue the Policy (discussed below), are fraudulent, because Credit Suisse did not recognize the contingent liabilities to the securitization trusts, based upon known evidence of defective loans, and Credit Suisse’s related repurchase obligations. Credit Suisse’s fraudulent intent is further confirmed by its conduct in this litigation. For nearly 10 months, Credit Suisse denied that it had issued any repurchase demands, at all, on the Loans. Only after MBIA proved the existence of these repurchase demands, and subsequent Credit Suisse settlements with originators that Credit Suisse should have remitted to the Trust, but instead kept for itself, did Credit Suisse reluctantly admit that it had issued repurchase demands on the Loans.
115. Credit Suisse engaged in this scheme with respect to Loans in the Transaction. Between September 28, 2005, and April 27, 2007, i.e., prior to the securitization’s closing on April 30, 2007, Credit Suisse issued repurchase demands or “putbacks” for more than 500 EPD loans to the parties from which Credit Suisse had acquired them (either the originators or loan sellers). Credit Suisse then securitized these loans into the Transaction, concealing and disregarding the evidence that the loans were originated illegally (i.e., through fraudulent means) or in violation of underwriting guidelines. (Indeed, as described above, MBIA has re-underwritten 181 of these loans and determined that 111 of them breach the warranted representations.) Credit Suisse’s
own findings and admissions that an EPD is strong evidence of underwriting and origination failures, supra, demonstrates that its practice of routinely securitizing EPD loans that are put back to originators – without disclosure to the securitization participants – was a material omission.
116. Of the hundreds of Loans that Credit Suisse putback prior to the securitization, between February 15, 2007 and March 6, 2007, before the close of the Transaction, Credit Suisse put back at least 255 of the New Century loans that Credit Suisse then securitized in the Transaction (i.e., more than 10% of the New Century loans it securitized in the Transaction), along with hundreds more loans to New Century that Credit Suisse did not securitize. Credit Suisse’s concealment of these repurchase demands constituted a material omission, given its (i) affirmative representations that it engaged in quality control and due diligence operations to avoid the securitization of defective loans; and (ii) partial, misleading securitization disclosures that there was a “risk” New Century may have departed from customary practices. In fact, Credit Suisse knew that New Century loans Credit Suisse securitized in the Transaction had suffered EPDs and had been subject of Credit Suisse repurchase demands.
117. Moreover, following the close of the Transaction, Credit Suisse put back to sellers/originators at least 200 more Loans (the bulk of which were also EPD). These were Loans that Credit Suisse no longer owned, because they had been sold to the Trust. Only 36 of these loans were either substituted out or repurchased from the trust by Credit Suisse. Credit Suisse’s failure (i) to provide notice of these EPD loans – which EPDs were prima facie evidence of improper underwriting or origination – and (ii) to repurchase the loans from the securitization, based upon the corresponding credit and compliance defects, constitutes a breach of Credit Suisse’s representations and warranties. Specifically, section 2.03(e) of the Pooling & Servicing Agreement requires
that “[u]pon discovery . . . of a breach of a representation or warranty made pursuant to Section 2.03(d) . . . the party discovering such breach shall give prompt notice thereof to the other parties and the Certificate Insurer.”
118. Finally, Credit Suisse settled repurchase demands made on originators/sellers pertaining to Loans in the Transaction, and pocketed those amounts, without providing notice to the Trust or repurchasing the Loans from the Trust. To date, based on the limited disclosures made, MBIA has identified twenty-six settlements by Credit Suisse of its repurchase demands against originators/sellers for Loans in the Transaction, including a simultaneous sale and repurchase transaction (i.e.¸ the loans were “sold” by Credit Suisse to the seller/originator and then “repurchased” at a lower price) for loans that Credit Suisse did not own, because they had been sold to the Trust. None of the settled Loans were repurchased from the securitization. Nor did Credit Suisse disclose to MBIA, the Trust, or investors that it had asserted repurchase claims pertaining to Loans it did not own.
119. Third, as another tactic to avoid asserting credit and compliance breaches, Credit Suisse employed a tiered repurchase demand process. Credit Suisse obtained warranties from loan sellers concerning both the underwriting and origination of the loans (“credit and compliance” warranties), as well as against early payment default. However, Credit Suisse intentionally avoided issuing repurchase demands expressly based upon known credit and compliance warranties, citing only payment default, so as to avoid creating a record that would concretely trigger Credit Suisse’s repurchase obligations from the securitizations. That is, Credit Suisse proceeded first with an EPD claim, and followed with a credit/compliance breach only if the EPD claim was
unsuccessful. As discussed in Credit Suisse’s Repurchase Policy Addendum, when Credit Suisse obtained evidence of credit or compliance breaches amongst its inventory or securitized loans (e.g., Appraisal Issues, Fraud – Manipulated/Falsified docs, Borrower Misrepresentations, Missing Documentation Issues, Compliance Issues, Credit Issues, or Occupancy Issues), Credit Suisse issued “advice letters” to the corresponding sellers/originators of the loans as a means of “advis[ing] the Seller that CSFB maintains the right in the future to require the Seller to repurchase the loan.” Credit Suisse did not, however, provide a similar notice to the securitization trusts, as it was required to by the terms of the PSA.
120. Credit Suisse used these advice letters, and its legal right to demand repurchase based upon credit and compliance issues, in the event an EPD claim was unavailable or did not prevail. In those instances, when Credit Suisse no longer had EPD protection, Credit Suisse policy was to assert repurchase rights based upon the credit and compliance breaches. To date, MBIA has identified advice letters issued for 29 loans in the Transaction. These advice letters to sellers/originators constitute admissions by Credit Suisse that it knew of credit and compliance defects for securitized loans, but failed to provide notice to the securitization trust and its insurers, and to repurchase the loans as required.
121. Credit Suisse’s failure to disclose that it had a policy designed to provide notice to originators/sellers of credit and compliance defects for loans in securitizations, without providing notice to the securitization participants, was another material omission that ran directly contrary to its representations concerning its repurchase protocols.