US hits RBS with $500 mn penalty for deceptive investments

RBS was the world's largest bank prior to the global financial crisis, for which it has paid out billions of dollars in relation to its role in the 2008 subprime housing meltdown
AFP

New York (AFP) – US authorities on Tuesday hit the Royal Bank of Scotland with a $500 million penalty for “deceptive practices” in mortgage investments it sold in the run-up to the global financial crisis.

The penalty follows $5.5 billion which the bank, once the largest in the world, agreed in 2017 to pay a US regulator.

RBS packaged toxic subprime mortgages into risky financial derivatives it sold to customers, a practice that helped spark the 2008 housing meltdown, New York state Attorney General Eric Schneiderman said in a statement.

The settlement includes $100 million in cash to the state, and $400 million worth of consumer relief for New York homeowners and communities as a result of the damage done by the sale of residential mortgage-backed securities (RMBS).

“RBS admits that it sold investors RMBS backed by mortgage loans that… did not materially comply with underwriting guidelines,” the statement said. 

In addition, “many of the mortgage loans did not comply with applicable laws and regulations.”

Defaults on mortgages led to a cascade of failures by financial institutions that packaged the loans but had no clear idea of which ones were good and which were likely to default, which ultimately led to the 2008 crisis.

“While the financial crisis may be behind us, New Yorkers are still feeling the effects of the housing crash,” Schneiderman said. 

“Home values plummeted. Vacant homes consumed neighborhoods.”

RBS has pledged to buy abandoned houses and to lend on favorable terms to the victims of the subprime crisis. 

The UK bank is the sixth financial institution to reach an agreement with Schneiderman’s agency on RMBS practices. The total amount of financial penalties imposed by the prosecutor is now more than $3.7 billion.

RBS last month announced its first annual post-tax profit since the eve of the financial crisis.

The gain of £752 million ($1.04 billion) for 2017 came after a drop in litigation and other costs which totaled billions of pounds and came largely over its role in the subprime housing meltdown.

Last July the bank agreed to pay $5.5 billion in a settlement with the US Federal Housing Finance Agency to resolve a lawsuit which alleged that RBS sold faulty mortgage bonds between 2005 and 2007.

RBS is majority-owned by the British government which bailed it out during the crisis but now plans to sell most of its stake.

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