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Cummings Issues Statement on SEC IG Report on David Becker Conflict of Interest in Madoff Scandal

Cummings Issues Statement on SEC IG Report on David Becker Conflict of Interest in Madoff Scandal

Washington, DC – The SEC Inspector General has completed a six-month investigation into allegations of conflict of interest against SEC’s former general counsel, David Becker, concerning his role in the Commission’s work relating to the victims of the Bernie Madoff Ponzi scheme.  The IG’s final report was issued publicly today.  Ranking Member Elijah E. Cummings issued the following statement:

“In its report, the IG’s office found sufficient evidence of Mr. Becker’s conflict of interest to call into question the integrity of the process used by the Commission to decide how to value fictitious profits made under the Madoff scheme.  The IG also found that procedures at the SEC ethics office broke down and failed to prevent a conflict of interest from potentially tainting the agency’s work.

“I believe the victims of the Madoff scheme deserve to know that the SEC’s decision in this case was not tainted by conflicts of interest.  The IG recommended that the Commission take a second look and conduct a revote of its decision.  I strongly urge the Commission to take these appropriate steps in order to give Madoff’s victims that peace of mind.

“I hope that the Commission will adopt the IG’s other recommendations as well.  I am encouraged that Chairman Schapiro asked SEC Inspector General H. David Kotz to open this investigation, which was a good faith effort on her part to get to get to the bottom of this issue.  I am also encouraged that Chairman Schapiro decided last year to revamp the office of ethics, to hire new ethics counsel for the agency, and to provide greater resources to that office.”




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Issa and Grassley Probe SEC on Failure to Properly Examine Conflict of Interest in Madoff Scandal

Issa and Grassley Probe SEC on Failure to Properly Examine Conflict of Interest in Madoff Scandal

WASHINGTON D.C. – Oversight and Government Reform Committee Chairman Darrell Issa and Committee on the Judiciary Ranking Member Senator Chuck Grassley sent a letter today requesting additional information from the Securities and Exchange Commission (SEC). Chairman Issa and Senator Grassley seek to clarify how the SEC neglected to act on the seemingly obvious, significant conflicts of interest presented by then-General Counsel David Becker’s involvement in the Madoff case.

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The Honorable Timothy Geithner Secretary of the Treasury Department of the Treasury 1500 Pennsylvania Avenue, N.W. Washington, D.C.

The Honorable Edward DeMarco Director (Acting) Federal Housing Finance Agency (FHFA) 1700 G Street, N.W. 4th Floor Washington, DC 20552

The Honorable Sheila Bair Chairman Federal Deposit Insurance Corporation 550 17th Street N.W. Washington D.C., DC 20006

The Honorable Ben S. Bernanke Chairman Board of Governors of the Federal Reserve System 20th Street and Constitution Avenue N.W. Washington, DC

The Honorable Mary L. Schapiro Chairman Securities and Exchange Commission 100 F Street, N.E. Washington, DC 20549

The Honorable John Walsh Comptroller of the Currency (Acting) Administrator of National Banks 250 E Street, S.W. Washington, DC 20219

Dear Secretary Geithner, Chairman Bair, Chairman Shapiro, Acting Director DeMarco, Chairman Bernanke and Controller Walsh:

We are writing to urge that any exception to the credit risk retention requirements of section 941 of the Dodd-Frank Act include rigorous requirements for servicing securitized residential mortgages.

The Act requires that securitizers retain five percent of the credit risk on mortgage-backed securities. The requirement is the subject of a study by Christopher M. James published by the Federal Reserve Bank of San Francisco dated December 13, 2010, and entitled “Mortgage-Backed Securities: How Important Is ‘Skin in the Game’?”, which finds that the requirement will have the intended effect of reducing “moral hazard” and significantly reducing the loss ratios on mortgage-backed securities.

The Act provides for an exception, however, for “qualified residential mortgages” and for other “exemptions, exceptions, and adjustments” to the risk-retention requirement. We strongly urge that you use great care in allowing any exception to the risk retention requirement, and that you be vigilant in assuring that any exception not defeat the purpose of the requirement. Recent experience in financial regulation has been that seemingly modest, reasonable exceptions have swallowed the rules and allowed abusive practices to continue unabated. In considering any requested exception under section 941, please remember that the advocates for rule-swallowing exceptions to other financial regulation have not been entirely candid with regulators or legislators on the likely effect of those exceptions.

The rules adopted pursuant to section 941 must, of course, require rigorous underwriting standards for “qualified residential mortgages” or any other mortgages excepted from the risk retention requirement, but underwriting requirements are not enough. The rules must also address the servicing of securitized mortgages. Much of the turmoil in the housing market, which is largely responsible for the painfully slow recovery, is the result not just of poorly underwritten mortgages, but of conduct by mortgage servicers.

We direct your attention to the “Open Letter to U.S. Regulators Regarding National Loan Servicing Standards” dated December 21, 2010, and signed by 51 people with extensive knowledge of mortgage servicing (the “Rosner-Whalen letter”). We strongly urge that you consider closely the recommendations included in that letter.

The Rosner-Whalen letter makes sensible recommendations regarding the treatment of payments by homeowners, “perverse incentives” in servicer compensation, mortgage documentation, and foreclosure forbearance during mortgage modification efforts.

We especially urge that any exception require that servicers modify mortgages pursuant to established criteria to avoid foreclosure where possible. The statute governing “Farmer Mac” mortgages provides a useful example of such criteria. See 12 U.S.C. 2202a (“Restructuring Distressed Loans”). Foreclosures are catastrophic for homeowners, holders of mortgage-backed securities, the housing market, and the economy as a whole.

The conduct of servicers is largely responsible for much unnecessary hardship. A requirement that servicers modify mortgage according to established criteria to avoid foreclosure can avoid that hardship in the future. Neutral, established criteria will also avoid “tranche warfare” between classes of investors.

We also especially urge that any rule for securitized mortgages require that servicers not be affiliated with the securitizer. There are obvious potential conflicts of interest, and no apparent countervailing justification. At a recent hearing of the House Financial Services Committee, several witnesses from major servicers were unable to offer any advantage in being affiliated with securitizers, other than to offer “full service” to customers. That justification is entirely unpersuasive. Homeowners may select the bank with which they have a credit card or a checking account, but they have no say in who services their mortgage.

In fact, community banks and credit unions have been reluctant to sell the mortgages that they originate to “private-label securitizers” for fear that the mortgages will be serviced by an affiliate of a bank, and the servicer will use that relationship to “cross market” other banking services to the homeowner. Requiring that servicers be independent of banks, therefore, would advance the goal of increasing the availability of credit on reasonable terms to consumers.

The Dodd-Frank Actives provides you ample authority to reform servicing practices, and regulation of mortgage securitization will be ineffective without such reform.


Rep. Brad Miller [and others]

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Re: National Standards for Loan Servicing

Dear Colleagues:

We the undersigned write to you regarding the urgent need to develop national standards for originating, selling and servicing mortgage loans. The private residential mortgage securitization market is frozen as to new issuance. The housing market is suffering from a dearth of credit, which is causing a serious lack of confidence among potential homebuyers.

Widely reported servicer fraud, whether in the foreclosure process or in the systematic assessment of illegal fees against homeowners, is also a serious problem. It’s bad for investors, it’s bad for homeowners, and it’s ultimately bad for a sustainable residential mortgage securitization market and the U.S economy. Fraud is also a symptom of the disease affecting our broader financial system, namely the lack of accountability in the loan servicing industry and the resulting impairment of the value of securities sold to investors.

Continue reading below…

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Grayson Sends Letter to FSOC Regulators on Foreclosure Fraud and Calls for Foreclosure Halt

Grayson Sends Letter to FSOC Regulators on Foreclosure Fraud and Calls for Foreclosure Halt

October 6, 2010

The Honorable Timothy F. Geithner   .The Honorable Sheila Bair
Secretary                                                        . Chairman
Department of the Treasury           . Federal Deposit Insurance Corporation
1500 Pennsylvania Avenue,          . NW 550 17th Street, NW
Washington, DC 20220                     . Washington, DC 20429

The Honorable Ben S. Bernanke                 .  The Honorable Mary Schapiro
Chairman                                                              . Chairman
Board of Governors of the Federal Reserve System    .Securities and Exchange Commission
20th Street and Constitution Ave,                                      .NW 100 F Street, NE
Washington, DC 20551 Washington, DC 20549

The Honorable John G. Walsh                                  .The Honorable Gary Gensler
Acting Comptroller of the Currency                     .Chairman
Office of the Comptroller of the Currency Commodity Futures Trading Commission
250 E St. SW                                                                    . 1155 21st St. NW
Washington, DC 20219                                                .Washington, DC 20581

The Honorable Ed DeMarco                                     .The Honorable Debbie Matz
Acting Director                                                             .Chairman
Federal Housing Finance Agency                         .National Credit Union Administration
1700 G Street,                                                               .NW 1775 Duke Street,
Washington, DC 20552                                              .Alexandria, VA 22314-3428

Dear Secretary Geithner and members of the Financial Stability Oversight Council (FSOC),

The FSOC is tasked with ensuring the financial stability of the United States, which includes identifying and addressing possible systemic risks. There is a well-documented wave of foreclosure fraud sweeping the country that presents such a risk. Bank of America and JP Morgan Chase have both suspended foreclosures in 23 states where that fraud could be uncovered and stopped by the courts. Connecticut has suspended foreclosures.

I write to encourage the FSOC to appoint an emergency task force on foreclosure fraud as a potential systemic risk. I am also writing to ask the members of the FSOC to use their regulatory authority to impose a foreclosure moratorium on all mortgages originated and securitized between 2005-2008, until this task force is able to understand and mitigate the systemic risk posed by the foreclosure fraud crisis.

So far, banks are claiming that the many forged documents uncovered by courts and attorneys represent a simple ‘technical problem’ with foreclosure processes. This is not true. What is happening is fraud to cover up fraud.

The mortgage lending boom saw the proliferation of predatory lending and mortgage fraud, what the FBI called at the time ‘an epidemic of mortgage fraud.’ Much of this was lender-induced.

When lenders – many of whom are now out of business – originally lent money to borrowers, they often did so knowing that the terms of the loans could not possibly be honored. They sought fees, not repayment. These lenders put people in predatory loans, they induced massive amounts of fraud, and Wall Street banks misrepresented these loans to investors when they moved through the securitization chain. They were stealing money from investors, and from homeowners.

Obviously these originators and servicers didn’t keep good records of who owed what to whom because the point was never about getting paid back, it was about moving as much loan volume as possible as quickly and as cheaply as possible. The banks didn’t keep good records, and there is good reason to believe in many if not virtually all cases during this period, failed to transfer the notes, which is the borrower IOUs in accordance with the requirements of their own pooling and servicing agreements. As a result, the notes may be put out of eligibility for the trust under New York law, which governs these securitizations. Potential cures for the note may, according to certain legal experts, be contrary to IRS rules governing REMICs. As a result, loan servicers and trusts simply lack standing to foreclose. The remedy has been foreclosure fraud, including the widespread fabrication of documents.

There are now trillions of dollars of securitizations of these loans in the hands of investors. The trusts holding these loans are in a legal gray area, as the mortgage titles were never officially transferred to the trusts. The result of this is foreclosure fraud on a massive scale, including foreclosures on people without mortgages or who are on time with their payments.

The liability here for the major banks is potentially enormous, and can lead to a systemic risk. Fortunately, the Dodd-Frank financial reform legislation includes a resolution process for these banks. More importantly, these foreclosures are devastating neighborhoods, families, and cities all over the country. Each foreclosure costs tens of thousands of dollars to a municipality, lowers property values, and makes bank failures more likely.

I appreciate your willingness to assess possible systemic risks to the country, and would again encourage you to suspend foreclosures until this problem is understood and its ramifications dealt with.


Alan Grayson

Member of Congress

Letter to FSOC Calling for Foreclosure Halt

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