Deutsche Bank is On the Mat by Origination and Underwriting Mortgage Fraud Expert Steven I. Butler

Mass. Mut. Life Ins. Co. v. DB [Deutsche Bank] Structured Prods., Inc.,

Civil Action No. 11-30039-MGM, at *10-14

(D. Mass. May 7, 2015)

REPUBLISHED BY LIT: DEC 27, 2021

In his Report, Mr. Butler reunderwrote loan files underlying certificates at issue in this action to determine whether they complied with representations in the offering documents, including representations regarding compliance with applicable underwriting guidelines and the borrowers’ ability to repay.

(Butler Report at 1-2.)

Using the representative Sample Properties selected by Dr. Cowan, Mr. Butler reunderwrote loans for which files were available that contained over 100 pages.

(Id. at 115 n.343.)

If a loan file was not produced or contained fewer than 100 pages, Mr. Butler used a loan from the supplemental random sample of 100 loans for each supporting loan group, in accordance with Dr. Cowan’s sampling methodology. (Id.)

See Massachusetts Mut. Life Ins. Co., 989 F. Supp. 2d at 170.

Mr. Butler ended up using 167 such supplemental loans and reunderwrote a total of 998 loans. (Id.)

Before reunderwriting the loans, Mr. Butler instructed his team of experienced underwriters to match the loans with the applicable underwriting guidelines in effect at or near the time of loan origination whenever they were available.

(Butler Decl. ¶ 13; Butler Report at 116.)

If the applicable originator underwriting guidelines were not available, however, he instructed the reunderwriting team to use the applicable aggregator underwriting guidelines—i.e., underwriting guidelines of an entity other than the originator, such as the securitization sponsor or an affiliate of the sponsor—in effect at or near the time of origination. (Id.)

Mr. Butler explained that, based on his experience, “aggregator guidelines are appropriate to use when the originator guidelines are not available because it is the aggregator that acquires the loans that are to be securitized and, in many instances, either approves the guidelines used by the originator or instructs the originator to use the aggregator’s guidelines” and, “[t]ypically, the guidelines of the originator and the aggregator have similar parameters and metrics.”

(Butler Decl. ¶ 13.)

If neither the applicable originator nor aggregator underwriting guidelines were available, or if the applicable guideline was silent on an issue, Mr. Butler directed his team to use “Minimum Industry Standards” to reunderwrite the loan file.

(Butler Decl. ¶ 15; Butler Report at 111.)

The Minimum Industry Standards, Mr. Butler explained, were basic industry standards which constituted lenient standards found in underwriting guidelines in the mortgage industry from 2005 to 2007.

(Butler Decl. ¶ 16; Butler Report at 112.)

“In other words, they were the minimum requirements necessary for even the most lenient of originators to assess a borrower’s ability to repay the mortgage and adequacy of the collateral.”

(Butler Report at 112.)

Minimum Industry Standards include verifying employment, investigating potential borrower misrepresentations, and taking steps to ensure the borrower has the ability to repay the loan, among others.

(Butler Decl., Ex. 8.)

Mr. Butler gleaned the Minimum Industry Standards from

(1) his experience in the industry and knowledge of standards used from 2005 to 2007;

(2) discussions with underwriters on his staff and members of the reunderwriting team who worked in the mortgage loan industry at that time;

(3) a review of underwriting guidelines, including manuals, references, matrices, and guides, used by originators during that time;

and

(4) discussions with other experts he knows and with whom he worked.

(Butler Decl. ¶ 17; Butler Report at 112.)

To confirm the accuracy of the Minimum Industry Standards, Mr. Butler compared them to the guideline requirements of four significant originators of loans between 2005 and 2007 that were known in the industry as having relatively lenient underwriting standards: Countrywide Home Loans, Inc., Long Beach Mortgage Company, New Century Financial Corporation, and WMC Mortgage Corp.

(Butler Decl. ¶ 18; Butler Report at 112.)

He determined that the Minimum Industry Standards were generally consistent with these four originators’ guidelines. (Id.)

Mr. Butler and his team found 3,539 individual underwriting guideline breaches in the 998 reunderwritten loans; most loans had multiple breaches.

(Butler Decl. ¶ 7.)

He determined that 744 of the 998 loans [LIT COMMENT; 75% OF LOANS] were originated with one or more breaches that meaningfully and substantially increased the credit risk associated with the loan.

(Id. ¶ 7; Butler Report at 4.)

The breaches included LTV or DTI ratios that exceeded guidelines; absence of necessary documentation; failure to investigate red flags, such as multiple loan applications with different stated incomes, recent credit inquiries, and high stated income with low assets and bank deposits; and failure to investigate the reasonableness of stated income.

(Butler Decl. ¶ 7; Butler Report at 131-148.)

Of those 744 materially defective loans, 475 (over 65%) were reunderwritten using the originators’ guidelines; 205 (over 27%) were reunderwritten using the aggregator’s guidelines; and 64 (8.6%) were reunderwritten using either the Minimum Industry Standards only or Minimum Industry Standards in combination with other sources such as representations in the offering documents. (Butler Decl. ¶¶ 14, 20.)

Who is ‘Expert’ Steven Butler?

Steven Butler, principal of Brittany Consulting, LLC D/B/A ButlerBank Consulting, has experience that includes serving as a Director of Dispute Consulting Services for a Big Four accounting firm, the Director of Financial Institutions Consulting for a national accounting firm, as well as serving as the President of three different banks over his career. As a consultant, Mr. Butler specializes in financial institution matters involving failed financial institutions, fraud, operations, lender liability, loan workouts and loan loss reserve issues. He has also provided strategic planning, acquisition due diligence interim management and loan policy and loan review services to financial institutions. Steve also performs money laundering investigations and compliance reviews.

Steve began his banking career in 1971 and his consulting career in 1986. His current clients include various banks, law firms and private companies. Steve has also served on the Board of Directors of three financial institutions and has served as the interim CEO of a savings bank.

Steve has a BS in Industrial Management/Business and Economics, as well as a Certificate in Financial Management from the University of Denver’s Graduate School of Business, is a Certified Fraud Examiner and an Accredited Associate of the Institute of Independent Business.

REPRESENTATIVE ASSIGNMENTS

Mass. Mut. Life Ins. Co. v. DB Structured Prods., Inc.,

Civil Action No. 11-30039-MGM, at *23-26

(D. Mass. May 7, 2015)

REPUBLISHED BY LIT: DEC 27, 2021

B. Motion to Exclude Mr. Butler’s Testimony

Defendants seek to exclude Mr. Butler’s expert testimony on the grounds that he improperly relied on the Minimum Industry Standards, used the wrong guidelines at times, based many findings on missing documents, used post-origination information, and relied wholesale on Dr. Kilpatrick’s analysis. Plaintiff, again, asserts Defendants’ challenges are meritless and, at most, go to the weight, not the admissibility, of Mr. Butler’s opinions.

Defendants argue forcefully that Mr. Butler cannot base his material misrepresentation findings on the Minimum Industry Standards because it is only the failure to comply with the specific underwriting guidelines described in the offering documents which is relevant.

Plaintiff argues, on the other hand, the Minimum Industry Standards are relevant when the applicable guidelines cannot be found or are silent on important issues. Plaintiff may be correct that the Minimum Industry Standards have some relevance under certain circumstances, but the court will defer deciding the issue at this time.

For now, the court concludes that Mr. Butler’s preparation of the Minimum Industry Standards was sufficiently reliable because they are based on specific standards and experts may opine as to industry customs and practices, if sufficiently qualified.

See Federal Housing Finance Agency v. Nomura, 2015 WL 930276, at *4 (S.D.N.Y. Jan. 29, 2015) (“FHFA has shown that the process that [the expert ] employed to identify the minimum underwriting standards that prevailed in the industry during the relevant timeframe is sufficiently reliable to make his testimony admissible. It is not novel for an expert to opine on customs and practices within an industry.”);

Assured Guarn. Mun. Corp., 920 F. Supp. 2d at 505 (“[E]xperts qualified by their experience may testify to their conclusions as long as they exhibit ‘in the courtroom the same level of intellectual rigor that characterizes the practice of an expert in the relevant field.’ . . . Walzak articulated the sources of information on which she relied . . . and applied her experience in the underwriting industry to the resultant findings to make a determination as to whether the deficiencies in a particular loan rose to the level of materiality.” (quoting Kumho Tire, 526 U.S. at 152)).

If the court precludes Mr. Butler from testifying about Minimum Industry Standards, it will not be because he is insufficiently qualified or prepared them in an unreliable manner but, rather, because those standards are not relevant to the task at hand. See Federal Housing Finance Agency v. Nomura, 2015 WL 930276, at *3-4.

Defendants next argue Mr. Butler’s opinion should be excluded because he applied the wrong guidelines at times.

As an initial matter, the court will not take Plaintiff’s invitation to preclude this argument based on Defendants’ alleged discovery violation of failing to identify the applicable guidelines in response to an interrogatory, although it does take into consideration the seeming unfairness of refusing to provide this information but then faulting Plaintiff for applying the wrong guidelines.

Plaintiff, the court finds, waited too long to raise this issue, despite its awareness of Defendants’ refusal to provide the discovery for some time.

See Monteagudo v. Asociacion de Empleados del Estado Libre Asociado de Puerto Rico, 554 F.3d 164, 172 n.8 (1st Cir. 2009) (“[T]his was a discovery issue that AEELA should have addressed earlier either by way of a motion to compel or a request for sanctions under Fed.R.Civ.P 37(c).”).

In any event, only a small portion of the loans were reunderwritten using the purported wrong guidelines, and Mr. Butler has since explained that his analysis does not materially change even when using the guidelines to which Defendants point.

(Bulter Decl. ¶¶ 23-25.)

Any error on Mr. Butler’s part does not render his analysis inadmissible.

See In re Washington Mut. Mortg. Backed Sec. Litig., 2012 WL 2995046, at *6 (W.D.Wash. July 23, 2012) (“Defendants have raised some question as to whether Holt properly applied each of the guidelines. But this hardly requires exclusion of his report, particularly where both sides seem to agree that application of the underwriting guidelines requires some discretionary decision-making. It is up to a jury to determine whether the purported flaw’s in Holt’s analysis renders his opinion unworthy of merit.”).

Defendants also fault Mr. Butler for basing many of his findings on documents missing from the loan files, contending that this does not demonstrate non-compliance with guidelines at the time of the original underwriting because there could be a variety of reasons why those documents are missing now.

The court concludes missing loan documents at this time may provide circumstantial evidence that those documents were also missing at the relevant time. Ultimately, the trier of fact will have to make that determination. But it is not a reason to exclude Mr. Butler’s opinion.

See Milward, 639 F.3d at 22 (“When the factual underpinning of an expert’s opinion is weak, it is a matter affecting the weight and credibility of the testimony—a question to be resolved by the jury.” (quoting U.S. v. Vargas, 471 F.3d 255, 264 (1st Cir. 2006)).

Defendants’ arguments regarding Mr. Butler’s use of post-origination information are similarly unavailing.

As Plaintiff asserts, the guidelines generally required underwriters to verify the reasonableness of information and to follow up on red flags.

Thus, post-origination sources may provide circumstantial evidence of failures in that regard, as many courts have held.

See, e.g., Federal Housing Agency v. Nomura Holding America, Inc., 2015 WL 568788, at *10 (“The defendants are wrong [that post-origination information is irrelevant]. Direct or circumstantial evidence, regardless of when that evidence first became available, would be relevant if it helped to demonstrate that an Originator did or did not follow its own underwriting guidelines or that the loan did or did not qualify under the Originator’s guidelines.”).

Defendants’ specific criticism of the use of Bureau of Labor Statistics (“BLS”) data likewise fails.

Mr. Butler referenced BLS data because other sources do not maintain historical data but BLS does. Moreover, similar to the expert in Assured Guar. Mun. Corp., 920 F. Supp. 2d at 506, Mr. Butler adequately accounted for the potential that BLS data might understate incomes by finding a borrower’s stated income unreasonable only when it exceeded the 90th percentile of the BLS index for the borrower’s occupation, position, and geographic location.

See also Cummings v. Standard Register Co., 265 F.3d 56, 64 (1st Cir. 2001) (“Duffy offered sufficient explanations for why he chose to use BLS data and Cummings’ 1997 salary in his calculations.”).

Lastly, the court finds no issue with Mr. Butler’s reliance on Dr. Kilpatrick’s data for his conclusion that loans violated the guidelines’ LTV requirements.

Mr. Butler did not simply parrot or rehash Dr. Kilpatrick’s finings but, rather, reached independent conclusions as to breaches of underwriting guidelines and whether those breaches substantially increased the loans’ credit risk.

See Ferrara & DiMercuio v. St. Paul Mercury Ins. Co., 240 F.3d 1, 9 (1st Cir. 2001) (“[T]he opinion he rendered was his own . . . . Federal Rule of Evidence 703 allows Malcolm to have taken O’Donnell’s report and opinion into account when forming his own expert opinion.”)

Moreover, as the First Circuit has explained, “when an expert relies on the opinion of another, such reliance goes to the weight, not to the admissibility of the expert’s opinion.” Id.

V. CONCLUSION

The court also DENIES Defendants’ motion to exclude the expert testimony of Mr. Butler . (Dkt. No. 359.)