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Subprime RMBS Settlement at Ally

Ally Financial Inc. has agreed to settle allegations of misleading marketing on the sale of subprime residential mortgage-backed securities.

The Detroit-based company’s subsidiary, Ally Securities LLC,
handled the packaging, securitization, marketing, sale and issuance of RMBS.

Among the offerings were
RASC-EMX series RMBS that were issued between 2006 and 2007. It served as the lead underwriter on the deals.

Ally Securities
dedicated a specialized marketing effort to create the RASC-EMX brand. It secured investors and directed third-party due diligence on samples of the RMBS loan pools to test compliance with disclosures made to investors in public offering documents.

But, according to an announcement Monday from the Office of the Special Inspector General for the Troubled Asset Relief Program, Ally Securities
recognized in 2006 and 2007 that there was a consistent trend of deterioration in the quality of the mortgage loan pools underlying 10 RASC-EMX transactions. The deterioration was, in part, a result of deficient underwriting and due diligence.

All of the transactions in question sustained losses as a result of the deficiencies.

conducted an investigation into Ally Securities, which was formerly known as Residential Funding Securities LLC, and found that it violated the Financial Institutions Reform Recovery and Enforcement Act.

Yesterday’s announcement said that Ally Financial has agreed to a settlement that includes a $52 million civil penalty.

The settlement requires Ally Securities to discontinue operations, and the
subsidiary will be wound-down immediately and de-registered as a broker-dealer.

“With this agreement, Ally acknowledges that the underwriting and diligence process was deficient in connection with the securitization of 40,000 toxic subprime mortgage loans by its subsidiaries — exactly the type of abuse that contributed to the financial crisis,” Special Inspector General for the Troubled Asset Relief Program Christy Goldsmith Romero said in the announcement.

Ally issued a statement indicating that the settlement
comprehensively resolves all outstanding investigations and potential claims under FIRREA and the False Claims Act by the Department of Justice tied to RMBS issued by its former subsidiary, Residential Capital LLC, and ResCap subsidiaries.

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