Ross McEwan. Picture: REUTERS/NEIL HALL
Ross McEwan. Picture: REUTERS/NEIL HALL

New York — Royal Bank of Scotland (RBS) agreed to pay $500m to settle New York’s probe into its marketing of toxic mortgage-backed securities that triggered the financial crisis, moving the government-owned lender a step closer to resolving a series of costly US investigations.

The deal boosts the bank’s US settlement costs to $6bn in less than a year for bundling dubious mortgages into top-rated securities and pitching them to investors in 2006 to 2008, before the housing bubble burst. In July, the lender agreed to pay $5.5bn to the Federal Housing Finance Agency to resolve a parallel investigation.

A separate probe by the justice department is still pending. RBS was down 0.6% to 258.6 pence at 9.09am in London trading.

Edinburgh-based RBS will pay New York $100m in cash and $400m for residents who were hurt by the housing crash, New York attorney-general Eric Schneiderman said on Tuesday in a statement. The deal boost’s New York’s mortgage-bond recoveries from a half dozen banks to $3.7bn, he said.

JPMorgan Chase and Bank of America previously paid $1bn and $800m, respectively, to settle New York’s investigations into sales of residential mortgage-backed securities. Citigroup, Morgan Stanley and Goldman Sachs Group also settled.

‘Heavy price’

"Settling these issues is a stark reminder of the heavy price we continue to pay for the global ambitions pursued by the bank in the run up to the crisis," RBS CEO Ross McEwan said in a statement. "Putting our remaining legacy issues behind us is a key part of our strategy. I am pleased that we have reached this settlement."

RBS issued and underwrote $32bn of mortgage bonds in the US before the financial crisis. When the bank settled with the Federal Housing Finance Agency in 2017, McEwan called it a "legacy matter" it was committed to resolving.

The bank still has exposure on the mortgage-bond issue. Federal prosecutors in Boston have investigated the bank and explored the possibility of bringing charges against individual employees. People familiar with the investigation told Bloomberg in 2017 that a settlement was close, but that turnover among senior officials at the justice department could slow the process.

Under the New York deal, RBS admitted to selling investors mortgage bonds that were backed by loans that didn’t "materially comply with underwriting guidelines", the attorney general said.

The bank’s own diligence vendors warned it that many of the loans it snapped up for securitisation didn’t conform to underwriting guidelines as RBS told investors, according to the statement.

"Yet, RBS packaged and sold them anyway," the attorney general said.

RBS was rescued by the UK government during the financial crisis in the biggest bank bailout in history.

"While the financial crisis may be behind us, New Yorkers are still feeling the effects of the housing crash," Schneiderman said. "Home values plummeted. Vacant homes consumed neighbourhoods. And for many New Yorkers, affordable housing fell out of reach."

RBS’s deal with Schneiderman hinges on "significant community-level relief," according to the statement. That includes money to spur the construction of more affordable housing, investment in land banks and the purchase of distressed properties to keep them out of the hands of predatory investors, the attorney general said.