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RBS to Pay More Than $150 Million in SEC Mortgage-Bond Case

Royal Bank of Scotland Plc will pay $153.7 million to resolve U.S. regulatory claims that a brokerage unit misled investors about the quality of a 2007 financial product backed by subprime mortgages.

RBS told investors that the loans backing the $2.2 billion security “generally” met the lender’s underwriting guidelines even though nearly 30 percent fell so short of the standards that they should have been excluded, the Securities and Exchange Commission said in a statement today.

The company’s Stamford, Connecticut-based RBS Securities Inc. unit, then known as Greenwich Capital Markets Inc., was paid about $4.4 million for underwriting the transaction yet only quickly reviewed the investment, the SEC said. RBS knew or should have known that many of the loans didn’t meet the lender’s underwriting standards, according to the statement.

“In its rush to meet a deadline set by the seller of these loans, RBS cut corners and failed to complete adequate due diligence, with predictable results,” George Canellos, co-director of the SEC’s enforcement division, said in the agency’s release.

RBS said in a statement that it cooperated fully with the SEC throughout the investigation and that the settlement payments are covered by provisions the bank has already made. In resolving the claims, RBS didn’t admit or deny wrongdoing.

Option One

In April 2007, RBS won a bid to purchase two large pools of subprime loans from Option One Mortgage Corp., a subsidiary of H&R Block, the SEC said. Option One conditioned the winning bid on a commitment to close the purchase by the end of H&R Block’s fiscal year, April 30, 2007.

In an effort to close the deal in time, RBS hired a third party to conduct due diligence on a small sample of the loans prior to the offering. That process revealed that several loans didn’t in fact meet Option One’s underwriting guidelines, which were intended to assess the value of the mortgaged property and the likelihood that the borrower would repay the loan, the SEC said.

Consistent with its rights, RBS excluded from the offering the 186 loans that it identified in the sample, the SEC said. However, the bank failed to conduct any further review to exclude additional loans even though it knew or should have known that there were likely more subprime loans in the pool that should have been excluded, according to the complaint.

RBS offered the security, known as Soundview Home Loan Trust 2007-OPT1, to investors in May 2007. Investors have lost at least $80 million to date, the SEC said.

The company agreed to pay $80.3 million in disgorgement, plus prejudgment interest of $25.2 million and a civil penalty of $48.2 million, and the money will be used to compensate harmed investors, the SEC said.

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