On July 12, 2017, the Royal Bank of Scotland (RBS) and the Federal Housing Finance Agency (“FHFA”) announced an agreement to settle claims arising out of RBS’s sale of allegedly faulty residential mortgage-backed securities (“RMBS”).  RBS will pay $5.5 billion to settle the claims.

The FHFA, as conservator of Fannie Mae and Freddie Mac, filed a lawsuit against RBS in 2011 in the United States District Court for the District of Connecticut, alleging that RBS violated federal and state securities laws in the sale and underwriting of approximately $32 billion in RMBS purchased by Fannie Mae and Freddie Mac from 2005 to 2007.  See Federal Housing Finance Agency v. The Royal Bank of Scotland Group plc, et al. (D. Conn., Case No. 3:11-CV-01383 (AWT)).  The FHFA alleged that in RBS’s offering documents, RBS falsely represented that the underlying mortgage loans complied with certain underwriting guidelines and standards, including representations that significantly overstated the ability of borrowers to repay their mortgage loans.  Fannie Mae and Freddie Mac alleged that they relied upon these false and misleading statements and suffered massive losses because of these misrepresentations.

The lawsuit against RBS is one of eighteen similar lawsuits that the FHFA filed against participants in the mortgage finance sector, including Bank of America, JPMorgan Chase, Deutsche Bank, and HSBC.  The settlement with RBS is the FHFA’s seventeenth settlement in these eighteen cases.  In the eighteenth case, the FHFA prevailed against Nomura at trial; that verdict is currently the subject of an appeal.

RBS is still the subject of a separate U.S. Department of Justice (“DOJ”) investigation and is seeking to enter settlement negotiations with the DOJ.  RBS’s chief financial officer, Ewen Stevenson, commented that there have been “no discussions with the DOJ of any substance so far” but that RBS “would still like to get it resolved, if [it] could, during this calendar year.”

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