RBS Settles with Connecticut for Record $120 Million Over Mortgage-Back Securities

The State of Connecticut and RBS Securities Inc. entered into a record $120 million settlement over the company’s underwriting of residential mortgage-back securities (RMBS) prior to the 2008 Great Recession.

"With today's settlement, we are holding RBS accountable under Connecticut law for its behavior that contributed significantly to the 2008 financial crisis,” said Attorney General George Jepsen.

The previous record for a settlement with the State of Connecticut was for $36 million last year with Standard & Poor’s for its conduct in the lead-up to the financial crisis. The majority of the settlement will be deposited in the state’s general fund.

Jepsen described RBS as one of the key players in the RMBS business prior to the financial crisis. It underwrote $250 billion in securities that have lost $40 billion to date.

Connecticut alleged that RBS wasn’t diligent and misrepresented the quality of the mortgage loans. In some cases RBS’s third-party vendors gave low grades to certain loans, but RBS gave them a higher grade and included them in RMBS pools.

"The ripple effect of the practices of financial institutions coupled with the devaluing of residential mortgage backed securities was felt by residents across Connecticut who were foreclosed out of their homes and lost their jobs as a result of the ensuing financial crisis," said Banking Commissioner Jorge Pérez.

Many similar securities were backed by subprime loans that homeowners weren’t able to pay back when the housing market crash took effect.

"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 misstated – the quality of the mortgage loans comprising many mortgage-backed securities.”

RBS has also agreed to certify with the state Department of Banking its compliance with conditions of a supervisory plan approved by the National Adjudicatory Council of the Financial Industry Regulatory Authority.

Banking Committee House Chair State Rep. Matthew Lesser (D-Middletown) called the settlement a major win for taxpayers and thanked Jepsen, Perez and staff members for their hard work.

"Connecticut regulators need to do everything in their power to bring about justice in cases where malfeasance contributed to the financial crisis," he said. "We need to continue to take the necessary legal and regulatory steps to ensure we do not see a repeat of this situation.”