From Securities Regulation Daily, August 15, 2018

Royal Bank of Scotland agrees to $4.9 billion settlement of RMBS charges

By Thomas G. Wolfe, J.D.

The Royal Bank of Scotland Group plc (RBS) has entered into a $4.9 billion settlement with the United States Justice Department to resolve federal civil claims that RBS misled investors in the underwriting and issuing of residential mortgage-backed securities (RMBS) between 2005 and 2008. According to the Justice Department, this settlement amount reflects the largest civil penalty imposed by the agency "for financial crisis-era misconduct at a single entity under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989" (FIRREA). Based on an investigation conducted by the U.S. Attorney’s Office for the District of Massachusetts into the RMBS practices of the bank and its pertinent subsidiaries and affiliates, an evidentiary basis was set for the Justice Department’s claims that RBS violated federal laws in connection with "its marketing, structuring, arrangement, underwriting, issuance and sale of RMBS." At the same time, the settlement agreement provides that it "does not constitute an admission by RBS of any facts or liability or wrongdoing."

In an Aug. 14, 2018, release, Acting Associate Attorney General Jesse Panuccio remarked that the settlement "holds RBS accountable for serious misconduct that contributed to [the] financial crisis, and it sends an important message that the Department of Justice will pursue financial institutions that illicitly harm the American economy and our consumers." Andrew E. Lelling, U.S. Attorney for the District of Massachusetts, noted that "[d]espite assurances by RBS to its investors, RBS’s deals were backed by mortgage loans with a high risk of default." Similarly, Jennifer Byrne of the Federal Housing Finance Agency’s Office of the Inspector General observed that the "actions of RBS resulted in significant losses to investors, including Fannie Mae and Freddie Mac, which purchased the Residential Mortgage-Backed Securities backed by defective loans."

Claims against RBS. The Justice Department contended that RBS routinely made misrepresentations, or failed to disclose, to investors about significant risks about its RMBS. Among other things, the "Annex 1: RBS Statement of Facts" concerning the settlement indicates that RBS allegedly: (i) employed flawed due-diligence practices; (ii) failed to disclose due-diligence and kick-out caps; (iii) changed due-diligence findings without justification; (iv) failed to disclose systemic problems with loan originators’ underwriting; (v) provided investors with inaccurate loan data; (vi) made misrepresentations about loan repurchases; and (vii) generally profited from its RMBS "at the expense of others."

According to the Justice Department, through its RMBS practices, 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." Moreover, "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."

In keeping with the contours of the settlement agreement, the Justice Department acknowledges that RBS does not admit these allegations, disputes them, and "there has been no trial or adjudication or judicial finding of any issue of fact or law."

Settlement terms. Under the terms of the Aug. 14, 2018, settlement agreement between RBS and the Justice Department:

• RBS agrees to pay $4.9 billion as a civil monetary penalty, recoverable under FIRREA, to the United States;
• the "covered conduct" of RBS pertains to the "creation, pooling, structuring, sponsorship, arranging, formation, packaging, marketing, underwriting, sale, or issuance prior to January 1, 2009, by RBS of the RMBS identified in Annex 2;"
• RBS and its subsidiaries and affiliates are released from any civil claims that could be asserted by the Justice Department arising under FIRREA, False Claims Act, Program Fraud Civil Remedies Act, Racketeer Influenced and Corrupt Organizations Act, Injunctions Against Fraud Act, and specified common-law theories of recovery;
• clarifies that the settlement does not release RBS from certain potential claims by other federal regulators and agencies; and
• RBS agrees to cooperate with the Justice Department and other federal agencies in the future concerning any document request, investigation, administration, or litigation pertaining to RBS’s "covered conduct" in the settlement.

Attorneys: Andrew E. Lelling, U.S. Attorney for the District of Massachusetts, and Chad A. Readler, U.S. Department of Justice, for the United States of America. Michael Shaw for The Royal Bank of Scotland Group plc.

Companies: Fannie Mae; Freddie Mac; The Royal Bank of Scotland Group plc

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