Updated, 8:14 p.m. |
The Royal Bank of Scotland agreed on Thursday to pay the Securities and Exchange Commission $153.7 million to settle charges that it misled investors into buying a risky mortgage-backed security offering, the latest move in a crackdown on mortgage practices that fueled the financial crisis.
The S.E.C. concluded that a bank subsidiary, R.B.S. Securities, had backed the offering with loans that had a high potential to default. The subsidiary, called Greenwich Capital Markets at the time, bought the loans in 2007 from Option One Mortgage Corporation. Under its agreement with Option One, a subsidiary of H&R Block, R.B.S. had to buy the loans by April 30 of that year.
In its hurry to close the deal, R.B.S. did not fully investigate the quality of the underlying mortgages, the commission said. The bank hired 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 commission said.
Even so, 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 on Thursday. “Today’s action punishes that misconduct and secures more than $150 million in relief for those harmed by this shoddy securitization.”
Under the settlement, R.B.S., which has been largely backed by the British government since the financial crisis, 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. It called those disclosures “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.”
According to the S.E.C. complaint, R.B.S. knew of problems with Option One’s underlying loans before the bank bought them. Days before the acquisition closed, one of the lead bankers at R.B.S. cautioned in an internal email that due diligence results on the quality of the loans had lately been “ugly.”
Last year, the S.E.C. settled a separate case involving subprime mortgages with Option One.
R.B.S. is the latest bank to come under fire from the S.E.C. for misleading investors about mortgage-backed securities before the crisis. Credit Suisse and JPMorgan Chase have settled charges with the S.E.C., while the agency recently sued Bank of America in a mortgage-backed security case.
JPMorgan is preparing to pay $13 billion to the Justice Department and a number of other government agencies in connection with its own mortgage-backed securities activities. The bank is still completing the settlement with the government.