Nev. AG announces settlement with Morgan Stanley

By Jessica M. Karmasek | Sep 28, 2011


LAS VEGAS (Legal Newsline) -- Nevada Attorney General Catherine Cortez Masto announced Tuesday that her office filed an Assurance of Discontinuance with Morgan Stanley Mortgage Capital Holdings.

The assurance will resolve an investigation into the firm's role in purchasing and securitizing roughly 3,000 subprime mortgages in Nevada, Masto said.

The assurance requires Morgan Stanley to:

* Commit to certain practices to securitize Nevada mortgages;

* Refund and adjust interest rates for certain Nevada borrowers; and

* Pay $7.2 million to prevent foreclosures and mortgage fraud in Nevada.

Filed in the Eighth Judicial District Court, the assurance will provide relief to between 600 and 700 consumers, valued at between $21 million and $40 million.

"Morgan Stanley's deceptive practices hurt Nevada homeowners and played a role in our economy's decline," Masto said in a statement. "This is the first step in the right direction to protect consumers and put an end to this financial firm's egregious behavior."

The attorney general's investigation centered on potential misrepresentations by lenders, including New Century Financial Corp., to Nevada consumers who took out subprime loans that were bought and securitized by Morgan Stanley.

These include whether lenders deceived consumers about the actual interest rate and payments on their loans, the appraised value of their property, and the potential payment shock when an initial teaser rate expired.

The investigation also examined whether lenders originated loans with multiple risk features that allowed them to lower borrowers' payments, but not their debt.

These layered risks included loans that were adjustable rate, stated income, interest-only, 100 percent financed, had extended amortization periods and/or qualified borrowers at the initial teaser rate, not the adjusted rate that would be in effect for most of the loan's term.

Masto's office also examined the extent to which Morgan Stanley was aware of these subprime lenders' allegedly deceptive practices through its due diligence process and whether Morgan Stanley substantially assisted these lenders by financing and purchasing their loans.

Morgan Stanley neither admits nor denies any wrongdoing.

Going forward, the company will only finance, purchase or securitize Nevada subprime mortgage loans if it has engaged in a "reasonable review" of such loans and determined that such loans comply with the Nevada Deceptive Trade Practices Act.

Morgan Stanley also will provide the following assistance to borrowers:

* Effectively cap the interest rates for eligible borrowers (whose interest rate has not already been adjusted) at a fixed interest rate that is no more than the initial teaser rate on those mortgages;

* Refund to eligible borrowers interest payments above the initial teaser rate;

* Make payments to eligible borrowers who defaulted on their loans after the interest rate reset; and

* Make payments to eligible borrowers for whom value of their properties, as determined by a broker price opinion, differed from the amount borrowed by more than 5 percent.

Borrowers eligible for relief will be notified by Morgan Stanley. No application or qualification process will be required, the Attorney General's Office said.

Masto said her office will monitor the company's compliance throughout this process. The settlement, she noted, requires Morgan Stanley to make regular reports to the Attorney General's Office to ascertain if future enforcement action is necessary.

From Legal Newsline: Reach Jessica Karmasek by email at jessica@legalnewsline.com.

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