Photographer: Luke MacGregor/Bloomberg

RBS Paid a Big Penalty Over Mortgages. Its Next One May Be Bigger

  • After FHFA deal, bank faces reckoning with Justice Department
  • If Obama-era cases are guide, penalty could exceed $11 billion

Even as Royal Bank of Scotland Group Plc said Wednesday it would pay $5.5 billion to settle a U.S. lawsuit over its crisis-era mortgage-bond business, it told investors that another big bill may be on the way.

It was referring to an unresolved investigation by the U.S. Justice Department into whether the bank misrepresented the quality of residential mortgage-backed securities it sold a decade ago. RBS is one of the last global banks to face a reckoning with the Justice Department. Its tab could rank near the top of the group, judging by the deal the bank struck this week with the Federal Housing Finance Agency over similar conduct.

Seven banks have resolved mortgage-securities probes with the Justice Department for a total of $44 billion, a set of settlements that have typically come after the banks resolved suits brought by the FHFA, the government’s housing-finance agency, over bonds sold to Fannie Mae and Freddie Mac.

Earlier QuickTake Q&A: A Sudden Burst of Activity on Mortgage Litigation

RBS’s FHFA penalty was bigger than those paid by Citigroup Inc., JPMorgan Chase & Co. and Deutsche Bank AG and was second only to that of Bank of America Corp. Those four banks went on to reach Justice Department settlements of $6 billion to $12 billion each. If the relationship between FHFA penalties and subsequent Justice Department penalties continues to hold, says Bloomberg Intelligence analyst Elliott Stein, RBS could end up facing a bill exceeding $11 billion, or twice its FHFA settlement.

That’s a big if. The FHFA and the Justice Department have calculated penalties using different methods. Also, the earlier agreements were reached with the Obama administration’s Justice Department. RBS is now dealing with Attorney General Jeff Sessions, who has yet to put his stamp on crisis-era bank settlements.

Sessions ended an Obama-era practice that allocated a portion of Wall Street settlement money to advocacy groups. Under the new policy, money collected as part of civil and criminal settlements may be used only to reimburse parties to the litigation or to compensate victims. That could limit the scope of any Justice Department agreement with RBS.

The prior cases allowed billions of dollars in penalties to be paid through consumer relief measures -- mortgage modifications, repayment plans and short sales, among other remedies. The Justice Department hasn’t said whether those so-called soft-dollar portions of the penalties will be allowed under the new policy.

RBS’s shares fell after the announcement of the FHFA settlement on Wednesday and closed 2 percent lower at 251.5 pence in London, paring their gain this year to 12 percent.

Legal Provisions

Following the FHFA settlement, which RBS’s chief financial officer said included no admission of guilt, RBS will still have almost $4 billion of provisions for legal matters related to U.S. mortgage bonds, principally the Justice Department probe. The bank said it may need to make “substantial” fresh provisions for the case, although it didn’t give any indication of when it might settle that investigation.

The CFO, Ewen Stevenson, told analysts Wednesday that the bank wasn’t in settlement discussions with the Justice Department and that it would be challenging to finalize a deal by the end of the year as it had hoped. He also cautioned against using the FHFA settlement to estimate the size of any Justice Department agreement.

The Justice Department’s investigation of RBS is unusual in that it may include criminal charges against individuals. Although the department’s previous mortgage-fraud settlements resulted from civil inquiries, people with knowledge of the matter say it’s contemplating individual criminal prosecutions of current or former RBS bankers in addition to a civil settlement. RBS has disclosed that it’s cooperating with civil and criminal inquiries by the Justice Department.

The U.S. attorney’s office in Boston is leading the RBS investigation. Last December the office notified Frank Skibo, a loan trader, that he “may face civil or criminal charges” arising from the investigation, according to a filing with the Financial Industry Regulatory Authority, known as Finra. Skibo, who hasn’t been charged, left the bank in January, according to his Finra record. He had already been planning to leave the bank, according to a person familiar with the matter.

Possible Charges

In addition to Skibo, several former RBS employees also face the threat of civil or criminal charges, according to people familiar with the matter. Asset-Backed Alert, an industry newsletter, said the other individuals included another whole loan trader and bankers in RBS’ capital markets division.

The U.S. attorney’s office in Boston didn’t immediately respond to a request for comment, nor did an attorney for Skibo.

Justice Department lawyers -- primarily operating from U.S. attorney offices -- continue to push forward with unresolved mortgage-bond cases left over from the Obama administration. HSBC Holdings Plc is negotiating a settlement, people familiar with the matter have said. And the Justice Department sued Barclays Plc late last year after the sides failed to reach a settlement.

It’s unclear how involved the new Justice Department leadership is in those efforts. Under President Barack Obama, the mortgage cases were overseen by the Justice Department’s No. 3 official, who took an active role in negotiating multibillion-dollar settlements with global banks and sued Barclays. Rachel Brand, the Trump-appointed official in that post, has been on the job for just over a month. The Justice Department’s civil division -- another key player in the previous settlements -- is operating under temporary leadership.

In the case of HSBC, Trump administration appointees have yet to weigh in, a person familiar with the matter has said.

— With assistance by Stephen Morris

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