In-House Counsel

New Century GC Sounded Early Warning About Subprime Exposure

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The general counsel of New Century Financial Corp. warned of unsound lending practices in a 2004 memo that was apparently ignored, according to a bankruptcy examiner’s report.

General counsel Stergios “Terry” Theologides warned in the memo that New Century evaluated borrowers’ ability to repay loans based on initial teaser interest rates, without considering what would happen when the loans reset to a higher rate, Corporate Counsel reports. Borrowers would be hit with “sticker shock,” Theologides said, and there was no guarantee they would be able to refinance in a tight credit market.

“We should not be making loans where the inability to refinance after two years leaves the borrower at very high risk of default,” Theologides wrote in the memo, which was quoted in the report by examiner Michael Missal of Kirkpatrick & Lockhart Preston Gates Ellis.

Theologides’ warning was ignored, even though he was a member of the senior management group and “certainly had influence within the company,” Missal told Corporate Counsel. He did not elaborate.

But a lawyer close to the case who did not want to be identified told the publication that “the lawyers raised some of the right questions, but never followed through, never pushed hard.”

Theologides and New Century’s outside law firm, O’Melveny & Myers, both took some criticism in the report for inadequate disclosure of risks in public filings. The report also hit O’Melveny for discovery delays. But much of the report focused on the role of accounting firm KPMG in New Century’s collapse.

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