A penalty included in a settlement between the Department of Justice and The Royal Bank of Scotland Group plc is reportedly largest of its kind ever for the department.
Between 2005 and 2008, RBS was involved in the underwriting and issuance of residential mortgage-backed securities. The business earned the bank “hundreds of millions of dollars,” according to the Justice Department.
But RBS is accused by the government of misleading investors by not disclosing systemic problems with originators’ underwriting and providing them with inaccurate data.
According to an announcement Tuesday, RBS’ own due diligence revealed that loans being securitized were not underwritten to RBS’ underwriting standards. Borrowers were routinely identified who were unable to repay the loans, while appraisal regularly included inflated values.
But investors were not told of these findings.
When due diligence determined that a loan shouldn’t be purchased, the Justice Department claims RBS directed vendors to waive the defects without justification. One vendor reportedly said RBS’ waivers exceeded the industry norm by 30 percent.
In fact, RBS allegedly agreed to limit the number of defective loans from its originating clients that were rejected for securitization.
As it was profiting from securitization activity, RBS was also ensuring that warehouse funds outstanding would be paid back from its customers.
“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,” the Justice Department stated. “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. ”
Today’s announcement indicates that RBS agreed to a settlement than include a $4.9 billion penalty.
“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,” the Justice Department said.
