GE Reaches $1.5B Settlement Over Claims Its Subsidiary Misrepresented Subprime Loans
General Electric has agreed to pay $1.5 billion to settle claims its subsidiary's lax quality control and financial incentives for loan approval led investors to lose "billions of dollars" and contributed to the 2008 financial crisis.
April 12, 2019 at 03:52 PM
3 minute read
General Electric has agreed to a $1.5 billion settlement with the Department of Justice over allegations its subsidiary misrepresented subprime loans it originated in the years leading up to the 2008 financial crisis.
In an emailed statement, a GE representative said the settlement ends the Financial Institutions Reform, Recovery, and Enforcement Act investigation of subsidiary WMC Mortgage Corp. and ”contains no admission of any allegations.”
“This is another step in our ongoing efforts to de-risk GE Capital,” said a GE spokesperson. “This agreement represents a significant part of the total legacy exposure associated with WMC and we are pleased to put this matter behind us.”
According to a Friday press release from the DOJ, WMC Mortgage “originated more than $65 billion in mortgage loans between 2005 and 2007,” the majority of which were eventually sold for inclusion in residential mortgage-backed securities. The DOJ claims most of the mortgage loans “did not comply with WMC's representations about the loans” and that GE personnel knew of the misrepresentation and allowed investors to lose “billions of dollars.”
General Electric Capital Corp. acquired WMC Mortgage in 2004. From 2005 to 2007, the DOJ claims the subsidiary aimed to increase profits by increasing loan originations. WMC analysts were given financial incentives to approve loans “even where the loan applications did not meet the criteria outlined in WMC's published underwriting guidelines,” according to the DOJ.
WMC's quality control over loan approvals is alleged to simultaneously have had “significant deficiencies,” with concerns raised by risk management managers ignored. When investors declined to purchase loans “due to defects,” the DOJ claims WMC attempted, sometimes successfully, to sell that same loan to another investor without “disclosing that the mortgage had previously been rejected or the reasons why.”
“The financial system counts on originators, which are in the best position to know the true condition of their mortgage loans, to make accurate and complete representations about their products. The failure to disclose material deficiencies in those loans contributed to the financial crisis,” Assistant Attorney General Jody Hunt said in a press release Friday. “As today's resolution demonstrates, the Department of Justice will continue to employ FIRREA as a powerful tool for protecting our financial markets against fraud.”
WMC was represented by Jenner & Block. GE and GE Capital were represented by Weil, Gotshal & Manges and Susman Godfrey.
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