Jail Time for Wall Street's Derivatives Writers?

[Celebration]

http://seekingalpha.com/article/200669-jail-time-for-wall-street-s-derivatives-writers

According to the SEC, these included bonds secured by mortgages that included borrowers with a high percentage of adjustable rate mortgages, relatively low borrower FICO scores, and a high concentration of mortgages in states like Arizona, California, Florida and Nevada that had recently experienced high rates of home price appreciation.

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The Fair Credit Protection Act protects consumers, including subprime borrowers, from impermissible use of their credit information. The term “consumer report” means any written, oral, or other communication of any information by a consumer reporting agency bearing on a consumer’s credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living. ‘‘Consumer information’’ means any record about an individual, whether in paper, electronic, or other form, that is a consumer report or is derived from a consumer report.

Such information may only be used with respect to specifically defined “permissible purposes.” Permissible purposes include those events that somehow involve or benefit the original borrower in some way. The borrower must either be applying for or receiving credit, or someone must be doing something, in the chain of contract, to facilitate the borrower’s ability to receive credit, such as creating, buying or selling an existing loan.

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The word “existing” is critical. Personal credit information can be legally and properly used to help securitize real mortgages that already exist. That means that when an investment bank creates mortgage backed bonds, it is perfectly ok to use credit information. Using private personal credit report information, however, to create synthetic derivatives, is NOT permissible. Synthetic derivatives do not involve buying, selling or servicing existing loans in any way. Synthetic derivatives do not facilitate the salutary public purpose of financing homes for families.