HSBC 2015 Annual Report Download - page 451

HSBC HOLDINGS PLC
449
Strategic Report Financial Review Corporate Governance Financial Statements Shareholder Information
securitised and sold by HSI to third parties. The outstanding principal balance on these loans was approximately $5.2bn as at
31 December 2015.
Participants in the US mortgage securitisation market that purchased and repackaged whole loans have been the subject of
lawsuits and governmental and regulatory inquiries, which have been directed at groups within the US mortgage market such
as servicers, originators, underwriters, trustees or sponsors of securitisations, and at particular participants within these
groups. As the industry’s residential mortgage foreclosure issues continue, HSBC Bank USA has taken title to an increasing
number of foreclosed homes as trustee on behalf of various mortgage securitisation trusts. As nominal record owner of these
properties, HSBC Bank USA has been sued by municipalities and tenants alleging various violations of law, including laws
regarding property upkeep and tenants’ rights. While HSBC believes and continues to maintain that the obligations at issue
and any related liabilities are properly those of the servicer of each trust, HSBC continues to receive significant adverse
publicity in connection with these and similar matters, including foreclosures that are serviced by others in the name of ‘HSBC,
as trustee’.
Between June and December 2014, a number of lawsuits were filed in state and federal court in New York and Ohio against
HSBC Bank USA as trustee of over 280 mortgage securitisation trusts. These lawsuits are brought on behalf of the trusts by a
putative class of investors including, amongst others, BlackRock and PIMCO funds. Similar lawsuits were filed simultaneously
against other non-HSBC financial institutions that served as mortgage securitisation pool trustees. The complaints against
HSBC Bank USA allege that the trusts have sustained losses in collateral value of approximately $38bn. The lawsuits seek
unspecified damages resulting from alleged breaches of the US Trust Indenture Act, breach of fiduciary duties, negligence,
breach of contract and breach of the common law duty of trust. HSBC filed motions to dismiss in several of these lawsuits,
which were, for the most part, denied. In December 2015, three new actions containing similar allegations were filed in state
and federal court in New York against HSBC Bank USA as trustee of over 40 mortgage securitisation trusts, many of which are
at issue in the previously filed trustee cases. The complaints in the new actions against HSBC Bank USA allege that the trusts
have sustained losses in collateral value of approximately $285m.
Various HSBC companies have also been named as defendants in a number of actions in connection with residential mortgage-
backed security (‘RMBS’) offerings, which generally allege that the offering documents for securities issued by mortgage
securitisation trusts contained material misstatements and omissions, including statements regarding the underwriting
standards governing the underlying mortgage loans.
HSBC Bank USA, HSBC Finance and Decision One Mortgage Company LLC (an indirect subsidiary of HSBC Finance) have been
named as defendants in various mortgage loan repurchase actions brought by trustees of mortgage securitisation trusts. In the
aggregate, these actions seek to have the HSBC defendants repurchase mortgage loans, or pay compensatory damages in lieu
of repurchase, totalling at least $1bn.
In addition to actions brought by trustees of securitisation trusts, HSBC Mortgage Corporation (USA) Inc. and Decision One
Mortgage Company LLC have been named as defendants in two separate actions filed by Residential Funding Company LLC
(‘RFC’), a mortgage loan purchase counterparty. These actions seek unspecified damages in relation to alleged losses suffered
by RFC as a result of approximately 25,000 mortgage loans purchased from HSBC between 1986 and 2007. Discovery is in
progress in both of these actions.
Since 2010, various HSBC entities have received subpoenas and requests for information from the DoJ and the Massachusetts
state Attorney General seeking the production of documents and information regarding HSBC’s involvement in specific private-
label RMBS transactions as an issuer, sponsor, underwriter, depositor, trustee, custodian or servicer. In November 2014,
HNAH, on behalf of itself and various subsidiaries including, but not limited to, HSBC Bank USA, HSI Asset Securitization Corp.,
HSI, HSBC Mortgage Corporation (USA), HSBC Finance and Decision One Mortgage Company LLC, received a subpoena from
the US Attorney’s Office for the District of Colorado, pursuant to the Financial Industry Reform, Recovery and Enforcement Act
(‘FIRREA’), concerning the origination, financing, purchase, securitisation and servicing of subprime and non-subprime
residential mortgages. Five non-HSBC banks have previously reported settlements with the DoJ of FIRREA and other mortgage-
backed securities-related matters. HSBC is cooperating with the US authorities and is continuing to produce documents and
information responsive to their requests.
HSBC expects the focus on mortgage securitisations to continue. As a result, HSBC companies may be subject to additional
claims, litigation and governmental or regulatory scrutiny relating to its participation in the US mortgage securitisation market.
There are many factors that may affect the range of possible outcomes, and the resulting financial impact of these matters.
Based upon the information currently available, it is possible that any liabilities that might arise as a result of these matters
could be significant.
Anti-money laundering and sanctions-related matters
In October 2010, HSBC Bank USA entered into a consent cease-and-desist order with the OCC, and HNAH entered into a
consent cease-and-desist order with the FRB (the ‘Orders’). These Orders required improvements to establish an effective
compliance risk management programme across HSBC’s US businesses, including risk management related to the Bank Secrecy
Act (‘BSA’) and AML compliance. Steps continue to be taken to address the requirements of the Orders.