RBS Securities Inc. will pay $120 million to the state of Connecticut to resolve an investigation into its underwriting of residential mortgage-backed securities prior to the 2008 financial crisis.
The settlement represents the largest single state settlement in Connecticut’s history.
“RBS was one of the key players in the RMBS (residential mortgage-backed securities) business in the lead-up to the financial crisis, underwriting $250 billion in securities that have to date suffered more than $40 billion in losses, state Attorney General George Jepsen said Oct. 3 in a joint statement with state Department of Banking Commissioner Jorge Pérez. “With today’s settlement, we are holding RBS accountable under Connecticut law for its behavior that contributed significantly to the 2008 financial crisis.”
Headquartered in Stamford, RBS Securities is an investment bank/broker-dealer owned by The Royal Bank of Scotland Group.
An RMBS is a type of mortgage-backed investment product that is backed by the mortgage payments of thousands of homeowners. Investors are entitled to the cash flows – the interest and principal payments – from the underlying mortgage loans. Prior to the 2008 financial crisis, such securities were backed by thousands of subprime loans that homeowners could not pay back when home prices collapsed and the recession took hold.
From January 2005 to December 2008, RBS served as the lead underwriter for approximately 250 RMBS deals worth $250 billion. As lead underwriter, RBS was required to conduct due diligence on the pools of residential mortgage loans that collateralized its RMBS deals, to ensure that representations made to the public and potential investors about the securities were accurate and complete.
The state alleged that RBS’ due diligence process was inadequate and resulted in omissions and misstatements in the representations made to the public and investors about the securities. On at least one occasion, the state alleged, a material number of loans deviated so greatly from underwriting guidelines that they should have been excluded from the loan pools, yet were not. In some cases, the state alleged, RBS’ own third-party vendors – who conducted an independent review of the loans – gave low grades to certain loans, but RBS regraded them at a higher level and included the loans in the pools. Various other incidents of dishonest and/or unethical conduct were also alleged by the state.
“The collapse of financial instruments, especially residential mortgage-backed securities, was directly responsible for the financial crisis that led to the Great Recession that so badly impacted the economies of our state and our nation,” Jepsen said. “RBS failed to properly determine – and misstated – the quality of the mortgage loans comprising many mortgage-backed securities.”
During a four-year investigation conducted by the attorney general’s office in coordination with the Department of Banking, Jepsen said they found “that RBS, one of the largest RMBS underwriters, failed on multiple fronts to ensure that the information it provided about RMBS deals was accurate.”
“The ripple effect of the practices of financial institutions coupled with the devaluing of residential mortgage backed securities was felt by residents across Connecticut who were foreclosed out of their homes and lost their jobs as a result of the ensuing financial crisis,” Pérez said.
The Department of Banking will receive $250,000 of the settlement funds to be used for financial education and training and a financial literacy program. The remainder of the settlement funds – $119,750,000 – will be deposited in the state’s General Fund.
RBS is no longer engaged in the business of securitizing newly originated residential mortgage-backed securities.
Additionally, as part of the settlement, for 10 years RBS will be required to certify with the state Department of Banking its compliance with conditions of the supervisory plan approved by the National Adjudicatory Council of the Financial Industry Regulatory Authority. RBS has agreed to comply with all applicable state law.
RBS has also signed a consent order with the Department of Banking to resolve claims based on RBS plc’s agreement with the U.S. Department of Justice on May 20, 2015, to plead guilty to one violation of the Sherman Antitrust Act for conspiring to manipulate the price of U.S. dollars and euros exchanged in the foreign currency exchange spot market.