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Related: About this forumRoyal Bank of Scotland Agrees to Pay $4.9 Billion for Financial Crisis-Era Misconduct
https://www.justice.gov/opa/pr/royal-bank-scotland-agrees-pay-49-billion-financial-crisis-era-misconductDepartment of Justice
Office of Public Affairs
FOR IMMEDIATE RELEASE
Tuesday, August 14, 2018
Royal Bank of Scotland Agrees to Pay $4.9 Billion for Financial Crisis-Era Misconduct
Settlement Is Largest Penalty Imposed On A Single Entity By The Justice Department For Financial Crisis-Era Misconduct
The Justice Department announced today a $4.9 billion settlement with The Royal Bank of Scotland Group plc (RBS) resolving federal civil claims that RBS misled investors in the underwriting and issuing of residential mortgage-backed securities (RMBS) between 2005 and 2008. The penalty is the largest 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, which authorizes the federal government to seek civil penalties against financial institutions that violate various predicate criminal offenses, including wire and mail fraud.
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The settlement includes a statement of facts that details using contemporaneous calls and emails of RBS executives how RBS routinely made misrepresentations to investors about significant risks it failed to disclose about its RMBS. For example:
RBS failed to disclose systemic problems with originators loan underwriting. RBSs reviews of loans backing its RMBS (known as due diligence) confirmed that loan originators had failed to follow their own underwriting procedures, and that their procedures were ineffective at preventing risky loans from being made. As a result, RBS routinely found that borrowers for the loans in its RMBS did not have the ability to repay and that appraisals for the properties guaranteeing the loans had materially inflated the property values. RBS never disclosed that these material risks both existed and increased the likelihood that loans in its RMBS would default.
RBS changed due diligence findings without justification. RBSs due diligence practices did not remove fraudulent and high-risk loans from its RMBS. For example, when RBSs due diligence vendors graded loans materially defective, RBS frequently directed the vendors to waive the defects without justification. One due diligence vendor, which tracked waivers by most major participants in the RMBS industry, concluded that RBS waived material defects 30% more frequently than the industry average. RBSs waiver of material defects routinely resulted in the securitization of loans with excessive risk. When it engaged in such waivers, RBS never included enhanced scratch-and-dent disclosures that would have alerted investors that loans with excessive risks were included in the RMBS.
RBS provided investors with inaccurate loan data. RBSs due diligence frequently found that loan data which RBS passed on to investors, who used the data to analyze the risks associated with its RMBS were riddled with errors. Many inaccuracies made the loans look less risky than they actually were. RBS, however, did not require originators to correct the data errors. In one deal, where RBS identified over 600 data errors associated with 563 loans (including debt-to-income ratios understated by as much as 2700%), RBS failed to disclose these errors even to the originator; instead, RBS reassured the originator that RBS had not required originators to correct data errors in the past and did not anticipate doing so for that deal.
RBS failed to disclose due diligence and kick-out caps. To develop and maintain business relations with originators, RBS agreed to limit the number of loans it could review (due diligence caps) and/or limit the number of materially defective loans it could remove from a RMBS (kick-out caps). RBSs scheme reached its height in two deals issued in October 2007. In both of these RMBS, RBS identified hundreds of underlying loans that carried a particularly high risk of default and would cause losses to the RMBS investors. RBS kept these materially risky loans in the RMBS, without disclosing their inclusion to investors, because RBS had agreed to a kick-out cap limiting the number of defective loans that RBS could exclude from the securities in exchange for receiving a lower price for the loan pool. As a result, over the entirety of its scheme, RBS securitized tens of thousands of loans that it determined or suspected were fraudulent or had material problems without disclosing the nature of the loans to investors.
Through its scheme, RBS earned hundreds of millions of dollars, while simultaneously ensuring that it received repayment of billions of dollars it had lent to originators to fund the faulty loans underlying the RMBS. RBS used RMBS to push the risk of the loans, and tens of billions of dollars in subsequent losses, onto unsuspecting investors across the world, including non-profits, retirement funds, and federally-insured financial institutions. As losses mounted, and after many mortgage lenders who originated those loans had gone out of business, RBS executives showed little regard for this misconduct and made light of it.
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