Royal Bank of Scotland to pay $150 million for misleading investors

The Royal Bank of Scotland has agreed to pay more than $150 million to the Securities and Exchange Commission to resolve allegations it deceived investors in a 2007 mortgage-backed security offering.

The bank was accused of describing the mortgages as good quality, even though 30% of them fell far short of underwriting guidelines and should not have been used to back an investment offering, the SEC said in a lawsuit against the bank.

Stamford, Conn.-based RBS, then known as Greenwich Capital Markets, reviewed a very small portion of the loans before offering the investment, the SEC said in a complaint filed in federal court in Connecticut. The bank was paid $4.4 million for underwriting the transaction, the SEC said.

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“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,” said George S. Canellos, co-director of the SEC’s enforcement division. “Today’s action punishes that misconduct and secures more than $150 million in relief for those harmed by this shoddy securitization.”

The SEC said it will use the money to compensate investors who lost money investing in the bad mortgages.

The bank told investors the loans backing the offering were “generally in accordance with” the lender’s underwriting guidelines, which consider the value of the home relative to the mortgage and the borrower’s ability to repay the loan. In fact, the SEC alleged, the bank “knew or should have known” that nearly one-third of the loans underlying the offering did not meet the underwriting guidelines.

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