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In a persistently low-interest rate environment, investors have been scrambling for high-yield opportunities across a variety of asset classes. The last several years have seen an explosion in the issuance of high yield debt (a/k/a "junk bonds"), collateralized loan obligations (which pool lower-rated commercial loans and then slice them into tranches for sale to investors) and securities backed by consumer automobile loans. Over the past two years, there has been widespread reporting in the media and cautionary messages from federal regulators regarding loosening underwriting standards in each of these markets, driven by investor demand and a so-called "reach for yield." Securities backed by subprime auto loans in particular have garnered significant media coverage and governmental scrutiny. A number of news reports have cited trends in the subprime auto loan market similar to those which characterized, and helped fuel the issuance of, residential mortgage-backed securities ("RMBS") prior to the financial crisis — such as questionable lending practices, falsified borrower information, market exuberance and loosening underwriting standards. This article explores some of these similarities and describes three recent developments in RMBS litigation which may impact future cases arising in the subprime auto loan context.
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