Something rotten about RBS’s $52m Massachusetts settlement

In Blog by Ian Fraser0 Comments

30 November 2011

The Royal Bank of Scotland has agreed to a $52 million settlement over the selling, financing, packaging and securitization of subprime mortgages in the United States in just one US state — activities which he bank’s former chief executive Sir Fred Goodwin consistently denied the bank was involved in.

What I find surprising about this deal is the bank’s claim that it’s done nothing wrong (“the bank denied wrongdoing”); surely if the Edinburgh-based bank was innocent, then it wouldn’t feel the need to shell out such a huge sum, would it?

RBS Financial Products, formerly known as RBS Greenwich Capital Management, agreed to the settlement with the Commonwealth of Massachusetts to settle claims that it financed, purchased and bundled residential loans that were “presumptively unfair” to borrowers. The subprime loans in question proved very costly for consumers and were often approved for people who were not qualified borrowers, the state said.

$40.2m of the money that RBS is shelling out will go towards mortgage relief for more than 700 US home owners with subprime loans, $8.9m will go to the state of Massachusetts, and $2.6 million has been earmarked for communities and others who were most damaged by foreclosures linked to the troubled loans, reported the Boston Globe. Massachusetts attorney general Martha Coakley said: “The securitization of subprime loans by investment banks is a major cause of the economic crisis. Investment banks profited handsomely from those securitizations at the expense of homeowners … The only way we are going to return to a healthy economy is for these banks to be held accountable.”

Coakley said the loans were unfair and violated state consumer law because they had an introductory “teaser” period of less than three years, an introductory “teaser” rate at least 2% below the fully indexed rate, a debt-to-income ratio of more than 50% and substantial prepayment penalties. Some might conclude this means they were deceptive and unscrupulously sold. Others would say caveat emptor.

RBS and RBS Greenwich Capital are also being sued by numerous other parties including the National Credit Union Advisory Board and the Federal Housing Finance Agency over the alleged fraudulent misselling of residential mortgage backed securities (RMBS). In the credit union case, RBS is being sued over $2.2bn of missold RMBS, and stands accused of “systematically abandoning” guidelines that should have governed the quality of the mortgages used in the bonds. The FHFA case – unusual in that it involves the US Federal Government suing a British bank that is 83%-owned by the British government – concerns $30.4 billion worth of RMBS that RBS and RBS Greenwich Capital allegedly mis-sold to the government-sponsored enterprises Fannie Mae and Freddie Mac at the height of the U.S. housing boom. RBS owed a duty of care to their clients, which they ignored, says the lawsuit.

The FHFA case against RBS claims its executives’ bonuses were so geared towards writing and passing on high-risk business that they rushed deals through without due diligence,  reported Simon English in the Evening Standard.

Sometimes the “owner occupancy data was materially false”, the FHFA alleges, leaving Fannie and Freddie with loans held by people who did not live in the properties and were therefore far more likely to walk away. RBS also “furnished appraisals that they understood were inaccurate and that they knew bore no reasonable relationships to the actual value of the underlying properties”, the law suits claims. RBS “approved borrowers for loans based only on the initial fixed ‘teaser rate’ without regard for borrowers’ ability to pay after the initial two-year period”.  Echoes of the Massachusetts settlement there. The Goodwin-led bank also made loans based on “information [it] knew or should have known was inaccurate or false” and had a “systematic disregard of their own underwriting guidelines”.

RBS said it intends to vigorously defend the case, although some experts have claimed the Edinburgh-based bank may struggle against the US Federal government.

RBS has been on a losing streak in the UK courts recently, despite shelling out some £200m a year to law firms. Separately the Financial Times is reporting that RBS has been fined $1.9m in the US after placing below-market prices in an auction among 13 credit default swap dealers. The auction was held to ascertain the value of debt issued by energy firm Dynegy, which recently filed for bankruptcy.

A one-hour, in-depth BBC documentary on the rise and fall of RBS is to be broadcast on BBC2 on Monday December 5th at 9pm 

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