Royal Bank of Scotland to Pay $153.7 Million to Settle Mortgage Case

The Royal Bank of Scotland agreed on Thursday to pay the Securities and Exchange Commission $153.7 million to settle charges it misled investors into buying a risky mortgage-backed security offering.

The S.E.C. concluded that a bank subsidiary, R.B.S. Securities Inc., backed the offering with subprime loans that fell far short of underwriting guidelines. R.B.S., called 'Greenwich Capital Markets' at the time, bought the loans in 2007 from Option One Mortgage Corporation. Under its deal with Option One, a subsidiary of H&R Block, R.B.S. had to buy the loans by April 30 of that year.

Hurrying to close the deal, the S.E.C. said, R.B.S. failed to fully investigate the quality of the underlying mortgages. It did hire an outside company 'to quickly conduct due diligence on a small sample' of the loans, a review that concluded that 'a large number' did not meet Option One's own underwriting standards, the S.E.C. said.

Ultimately, R.B.S. turned the loans into a $2.2 billion offering. It was paid $4.4 million for its underwriting work.

'In its rush to meet a deadline set by the seller of these loans, R.B.S. cut corners and failed to complete adequate due diligence, with predictable results,' George S. Canellos, co-director of the S.E.C.'s enforcement division, said in announcing the settlement. 'Today's action punishes that misconduct and secures more than $150 million in relief for those harmed by this shoddy securitization.'

As part of the settlement, R.B.S., which since the financial crisis is largely backed by the British government, did not admit or deny any wrongdoing. The S.E.C. will use the settlement money to help compensate investors.

In a statement, the bank said that it 'has cooperated fully with the S.E.C. throughout the investigation.' It added, 'These payments are covered by provisions already made by R.B.S.'

The S.E.C. built its case around the bank's disclosures to investors who bought the securities. Those disclosures, the S.E.C. said, were 'misleading.' While R.B.S. said that the loans 'generally' complied with Option One's underwriting guidelines, the S.E.C. said that the bank should have known that 30 percent of the loans 'deviated so much from the lender's underwriting guidelines that they should have been kicked out of the offering entirely.'

Underwriting guidelines considered the value of a home relative to a borrower's mortgage and his or her ability to repay it. The S.E.C. concluded that R.B.S. misled investors by providing false assurances that the loans backing its offering 'generally' met those underwriting guidelines.

'R.B.S. knew or should have known that was false because due diligence before the offering showed that almost 30 percent of the loans underlying the offering did not meet the underwriting guidelines,' the S.E.C.'s statement said.

Banks bundled, sliced and sold subprime mortgages to each other in the lead-up to the financial crisis of 2008. As borrowers began to default on their loans, it created a domino effect that crippled some of Wall Street's largest institutions and led to tighter regulation.

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