Connecticut has reached a $120 million settlement with RBS Securities Inc. over allegations the Stamford-based financial services firm misled investors who bought products backed by bundles of residential mortgages during the lead-up to the housing market collapse and the 2008 financial crisis.
The payment is the largest single state settlement in the history of Connecticut.
The investments, called residential mortgage-backed securities, were financed by mortgage payments from thousands of homeowners. Returns were paid out from interest and principal payments on the underlying mortgage loans.
The state said RBS Securities didn’t carefully scrutinize those loans, many of which were risky, subprime loans that homeowners defaulted on when real estate prices sank. Investors lost out to the tune of $40 billion.
“RBS failed to properly determine — and misstated — the quality of the mortgage loans comprising many mortgage-backed securities,” Attorney General George Jepsen said in a statement.
He said the firm had “failed on multiple fronts” to provide accurate information to investors, and that the collapse of investments like the residential mortgage-backed securities had fueled the financial crisis that led to the Great Recession.
RBS Securities Inc. is a subsidiary of the Royal Bank of Scotland, which has its American headquarters in Stamford with more than 1,000 workers in a 12-story building downtown.
The company didn’t admit any wrongdoing, according to the settlement agreement, which is dated Sept. 30. An RBS spokesperson didn’t return a call for comment Monday.
The settlement ends a four-year investigation by Jepsen’s office and the state Department of Banking.
“We are pleased to have resolved this litigation,” said Kat Hanley, a spokeswoman for RBS. “Putting these issues behind us remains a priority. There is more work to be done, but we are making progress.”
From January 2005 to December 2008, RBS was the lead underwriter for 250 RMBS deals worth $250 billion, according to Jepsen’s office. As the lead underwriter RBS was tasked with doing “due diligence” on the pools of mortgages to make sure the public and potential investors had accurate and complete information about the loans.
The state alleged RBS’ due diligence process was lacking, and resulted in omissions and misstatements about the mortgages. In some cases, the state said, RBS gave higher grades to loans that its own third-party vendors had given low grades to.
The state also alleged that RBS made false representations in prospectus materials when they said the portfolios of mortgages had received thorough credit and compliance reviews and that risky loans wouldn’t be included in the packages.
“RBS was one of the key players in the [residential mortgage-backed securities] business in the lead up to the financial crisis, underwriting $250 billion in securities that have to date suffered more than $40 billion in losses,” Jepsen said. “With today’s settlement, we are holding RBS accountable under Connecticut law for its behavior that contributed significantly to the 2008 financial crisis.”
The state Department of Banking will receive $250,000 from the settlement for financial education and training and a financial literacy program. The remainder will go into the state’s general fund.
“One of the primary missions of our department is to protect Connecticut residents and consumers of financial products,” said Connecticut Banking Commissioner Jorge Perez. “This settlement helps us do that by compelling a modification to RBS’ business practices that ensures this does not happen in the future.”
RBS is no longer involved with the type of investments at the heart of the dispute. The company also agreed to be subject to state monitoring for the next 10 years.
