Justice Department officials say that the banking giant routinely misled investors about the risky loans underlying the securities
The Royal Bank of Scotland Group will pay $4.9 billion to settle federal claims that RBS misled investors about the quality of shoddy residential mortgage-backed securities during the years leading up to the financial crisis. The penalty is the largest so far imposed by the Justice Department for financial crisis-era misconduct at a single entity under the Financial Institutions, Reform, Recovery and Enforcement Act of 1989 (FIRREA).
“This resolution – the largest of its kind – holds RBS accountable for defrauding the people and institutions that form the backbone of our investing community,” said Andrew E. Lelling, US attorney for the District of Massachusetts. “Despite assurances by RBS to its investors, RBS’s deals were backed by mortgage loans with a high risk of default. Our settlement today makes clear that institutions like RBS cannot evade responsibility for the damage caused by their illicit conduct, and it serves as a reminder that the Justice Department, and this office, will hold those who engage in fraudulent conduct accountable.”
According to the Justice Department, RBS routinely lied to investors about significant risks about its residential mortgage bonds. The bank allegedly failed to disclose “systemic problems” with originators’ underwriting. RBS routinely found in its own due diligence that borrowers for the loans in its securities did not have the ability to repay, and that appraisals for the properties guaranteeing the loans had “materially inflated” property values. The bank’s mortgage-backed securities contained, as one executive put it in an internal communication, “total f***ing garbage loans” with “random” and “rampant” fraud that was “all disguised to, you know, look okay, kind of … in a data file.”
The bank also allegedly changed due diligence findings without justification. When RBS’s due diligence vendors graded loans as materially defective, the bank often told them to waive the defects with no justification. One due diligence vendor estimated that RBS waived material defects 30% more often than the industry average.
Federal investigators said that RBS earned hundreds of millions of dollars through the scheme, while simultaneously ensuring that it received billions of dollars in repayments of money it had lent to originators to fund the shoddy loans underlying the securities.
“The actions of RBS resulted in significant losses to investors, including Fannie Mae and Freddie Mac, who purchased the residential mortgage-backed securities backed by defective loans,” said Jennifer Byrne, associate inspector general with the Federal Housing Finance Agency – Office of the Inspector General.
RBS has had to open its wallet frequently since the financial crisis. Last month, the bank paid a $20 million penalty to settle mortgage bond-related claims in California. In June, it lost a Supreme Court bid to overturn an $839 million penalty from a lawsuit brought by the Federal Housing Finance Administration.
