The Royal Bank of Scotland (RBS), the United Kingdom’s third-largest bank, has been fined $4.9 billion dollars for alleged financial misconduct after the U.S. Department of Justice (DOJ) found that the bank misled investors with its residential mortgage-backed securities between 2005 and 2008.
The penalty is the largest settlement imposed by the Justice Department towards a single bank for misconduct leading up to the financial crisis.
Under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, the federal government can be authorized “to seek civil penalties against financial institutions that violate various predicate criminal offenses, including wire and mail fraud.”Andrew E. Lelling, U.S. Attorney for the District of Massachusetts said, “This resolution—the largest of its kind—holds RBS accountable for defrauding the people and institutions that form the backbone of our investing community.”
Non Disclosure
According to the DOJ, the RBS failed to disclose to investors the significant risks related to its residential mortgage-backed securities (RMBS). These RMBS were backed by defective loans which resulted in significant losses to investors.
According to Investopedia, RMBS are a type of mortgage-backed debt obligation created from residential debt. They are similar to bonds where owners have the right to share principal and interest from mortgage repayments from a pool of mortgage loans created by banks and other financial institutions. The loans become high risk when mortgage repayments cannot be met.It is alleged that the RBS’s loan originators had failed to follow their own underwriting procedures and that their procedures were ineffective at preventing risky loans from being made. As a result, borrowers for the loans did not have the ability to repay the loans and were at risk or were in default.
It is also alleged that RBS provided inaccurate data that made loans appear less risky. RBS did not require originators to correct these data errors which led to over 600 data errors associated with 563 loans in one deal.
