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Editor: Eric C. Chaffee
Univ. of Toledo College of Law

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Tuesday, August 7, 2007

First Bancorp Settles Financial Fraud Charges Involving Subprime Mortgages

First Bancorp, a NYSE-listed, Puerto Rico-based bank holding company, settled SEC charges that its former senior management concealed the true nature of more than $4 billion worth of transactions involving "non-conforming" residential mortgages. Non-conforming mortgages have income verification and credit history standards that are generally more flexible than those required for sale or exchange under Fannie Mae and Freddie Mac programs and can constitute subprime mortgages.  First BanCorp consented to being permanently enjoined from violating the antifraud, reporting, books and records and internal control provisions of the federal securities laws and paying an $8.5 million civil penalty.

The Commission's complaint charged First BanCorp with aiding and abetting violations of the federal securities laws by Doral Financial Corporation, another NYSE-listed, Puerto Rico-based bank holding company. Doral Financial previously consented to the entry of a court order enjoining it from violating the antifraud, reporting, books and records and internal control provisions of the federal securities laws and ordering that it pay a $25 million civil penalty.  According to the complaint, First BanCorp, which purportedly purchased the non-conforming mortgages from Doral Financial, profited from the transactions by earning more than $100 million in net interest income. Doral Financial, which purportedly sold the mortgages to First BanCorp, improperly recognized income on the transactions. According to the Commission, the mortgage-related transactions were not true sales under generally accepted accounting principles because senior management of Doral Financial agreed orally and in emails to extend the recourse provision from the 24-month period included in the written agreements to full recourse for the duration of the mortgages.

http://lawprofessors.typepad.com/securities/2007/08/first-bancorp-s.html

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