Deutsche Bank Finalizes $7.2 billion Settlement with DOJ

Deutsche Bank has agreed to a $7.2 billion settlement with the Department of Justice for selling toxic mortgage-backed securities in the years before the market meltdown of 2008.

The DOJ said Tuesday that the settlement -- which includes a $3.1 billion civil penalty -- is the largest of its kind levied by the department.

The other $4.1 billion included in the settlement is earmarked for "relief to underwater homeowners, distressed borrowers and affected communities," DOJ said in a statement. That includes issuing loan forgiveness and forbearance and providing funding for affordable housing across the U.S., to be overseen by an independent monitor.

"Deutsche Bank did not merely mislead investors: It contributed directly to an international financial crisis," Attorney General Loretta Lynch said.

"Our conduct in this matter falls short of our standards and is unacceptable," said Deutsche Bank CEO John Cryan. "We apologize unreservedly for it. We have subsequently exited many of the underlying activities and comprehensively improved our standards."

The deal was first announced in December, but Tuesday marked the formal closure of the settlement.

According to the DOJ, Deutsche Bank told investors that loans securitized in its RMBS were originated with sound underwriting guidelines.

“But as Deutsche Bank now acknowledges, the bank’s own reviews confirmed that ‘aggressive’ revisions to the loan originators’ underwriting guidelines allowed for loans to be underwritten to anyone with ‘half a pulse,’” the DOJ said. “More generally, Deutsche Bank knew, based on the results of due diligence, that for some securitized loan pools, more than 50% of the loans subjected to due diligence did not meet loan originators’ guidelines.”

Deutsche Bank also “knowingly misrepresented” that loans were reviewed to ensure borrowers had the ability to repay their loans.

“As Deutsche Bank acknowledges, the bank’s own employees recognized that Deutsche Bank would ‘tolerate misrepresentation’ with ‘misdirected lending practices’ as to borrower ability to pay, accepting even blocked-out borrower pay stubs that concealed borrowers’ actual incomes,” the DOJ said.

The DOJ also said that Deutsche Bank admitted to the following actions:

Deutsche Bank concealed from investors that significant numbers of borrowers had second liens on their properties.

Deutsche Bank purchased and securitized loans with substantial defects to provide “flexibility” to the mortgage originators on whom Deutsche Bank’s RMBS program depended for a continued supply of loans. Indeed, after the president of a large mortgage originator told Deutsche Bank he was “very upset with the rejection percentage,” Deutsche Bank’s diligence team was instructed, on three separate occasions, to clear loans it previously determined should be rejected.

While Deutsche Bank conducted due diligence on samples of loans it securitized in RMBS, Deutsche Bank knew that the size and composition of these loan samples frequently failed to capture loans that did not meet its representations to investors. In fact, Deutsche Bank knew “the more you sample, the more you reject.”

Deutsche Bank knowingly and intentionally securitized loans originated based on unsupported and fraudulent appraisals. Deutsche Bank knew that mortgage originators were “‘giving’ appraisers the value they want[ed]” and expecting the resulting appraisals to meet the originators’ desired value, regardless of the actual value of the property. Deutsche Bank concealed its knowledge of pervasive and consistent appraisal fraud, instead representing to investors home valuation metrics based on appraisals it knew to be fraudulent.

By May 2007, Deutsche Bank knew that there was an increasing trend of overvalued properties being sold to Deutsche Bank for securitization. As one employee noted, “We are finding ourselves going back quite often and clearing large numbers of loans [with inflated appraisals] to bring down the deletion percentages.” Deutsche Bank nonetheless purchased and securitized such loans because it received favorable prices on the fraudulent loans. Ultimately, Deutsche Bank enriched itself by paying reduced prices for risky loans while representing to investors valuation metrics based on appraisals the Bank knew to be inflated.