RBS pays CT a record $120M to settle mortgage underwriting case

One of the nation’s largest underwriters of mortgage-backed securities, Stamford-based RBS Securities Inc., has agreed to pay Connecticut $120 million — the single-largest settlement in state history — to resolve an investigation into its underwriting, Attorney General George Jepsen and Banking Commissioner Jorge Perez announced Monday.

While the deal could offer a boost to current state finances, it was unclear whether that boost would match the settlement amount.

That’s because state legislators and Gov. Dannel P. Malloy took an unprecedented step last May when they adopted the current budget, assuming $40 million in new revenue tied to then-unachieved legal settlements.

Attorney General George Jepsen


Attorney General George Jepsen

“The collapse of financial instruments, especially residential mortgage-backed securities, was directly responsible for the financial crisis that led to the Great Recession that so badly impacted the economies of our state and our nation,” Jepsen said.

RBS failed to properly determine, and at times misstated, the quality of mortgage loans backing many securities, Jepsen said, adding that his staff and Department of Banking officials reviewed thousands of emails and other documents and records; deposed current and former RBS employees, and analyzed RBS’s due-diligence processes.

“What we found through this investigation was that RBS, one of the largest RMBS (residential mortgage-backed securities) underwriters, failed on multiple fronts to ensure that the information it provided about RMBS deals was accurate, Jepsen added.

RBS served as the lead underwriter from January 2005 through December 2008 of 250 residential mortgage-backed securities deals valued at $250 billion.

The state alleged that RBS’s due-diligence process — to ensure that the mortgage loans behind these securities were sound — was inadequate, resulting in omissions and misstatements.

In some cases, the state charged, RBS’ third-party vendors conducted independent reviews of loans and gave them low grades, but RBS nonetheless regarded them at a higher level.

Department of Banking Commissioner Jorge Perez


Department of Banking Commissioner Jorge Perez

“One of the primary missions of our Department (of Banking) is to protect Connecticut residents and consumers of financial products,” Perez said. This settlement helps us do that by compelling a modification to RBS’s business practices that ensures this does not happen in the future.”

The department will receive $250,000 of the settlement funds to train staff to identify and investigate these practices in the future, and to provide educational outreach to Connecticut residents.

RBS is no longer engaged in the business of securitizing newly originated residential mortgage-backed securities, Jepsen and Perez said. RBS also will be required to certify with the state Department of Banking its compliance with conditions of the Supervisory Plan approved by the National Adjudicatory Council of the Financial Industry Regulatory Authority for the next 10 years.

“The settlement with RBS is a major win for Connecticut taxpayers,” said Rep. Matthew Lesser, D-Middletown, co-chairman of the legislature’s Banking Committee. “… Connecticut regulators need to do everything in their power to bring about justice in cases where malfeasance contributed to the financial crisis. We need to continue to take the necessary legal and regulatory steps to ensure we do not see a repeat of this situation.”

The $120 million settlement is the single-largest in state history by a wide margin. The next largest was a 2015 agreement with Standard & Poor’s under which the Wall Street credit rating agency paid $36 million to settle a probe into its conduct leading up to the 2008 financial crisis.

About Keith M. Phaneuf

Keith, with Jacqueline Rabe Thomas, won first prize in investigative reporting from the Education Writers Association in 2012 for a series of stories on the Board of Regents for Higher Education. The former State Capitol bureau chief for The Journal Inquirer of Manchester, Keith has spent most of 24 years as a reporter specializing in state government finances, analyzing such topics as income tax equity, waste in government and the complex funding systems behind Connecticut's transportation and social services networks. A former contributing writer to The New York Times, Keith is a graduate of and a former journalism instructor at the University of Connecticut. E-mail him at kphaneuf@ctmirror.org.