U.S. corporate giant General Electric (GE) is paying a US$1.5 billion penalty to resolve allegations that a financial subsidiary misrepresented the quality of subprime loans it made and sold for inclusion in mortgage securities in the run up to the financial crisis.
The U.S. Department of Justice (DoJ) announced on Friday that GE has agreed to pay a civil penalty to address claims that WMC Mortgage (WMC), a GE subsidiary, allegedly misrepresented the quality of loans and its internal underwriting controls in connection with subprime loans that were subsequently packaged into residential mortgage-backed securities (RMBS).
According to the DoJ, WMC originated more than US$65 billion in mortgages between 2005 and 2007; and sold the vast majority of those loans to investment banks, which used them in RMBS.
It alleged that the firm misrepresented the quality of those loans, and that investors ultimately suffered “billions of dollars in losses as a result of WMC’s fraudulent origination and sale of loans for inclusion in RMBS.”
“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 U.S. attorney general Jody Hunt said in a statement.