RBS Makes Settlement with NCUA for $129.6M over MBS Suit

The Royal Bank of Scotland Group plc RBS is set pay $129.6 million to settle a lawsuit that accused the bank of selling toxic mortgage-backed securities (MBS) to now-failed credit unions in the U.S. According to the filing in a New York federal court on Tuesday, the two RBS units have not admitted liability.

The settlement relates to a 2013 lawsuit filed by the National Credit Union Administration (NCUA) – the U.S. watchdog that regulates and supervises federal credit unions – on behalf of two now-defunct credit unions, Southwest Corporate Federal Credit Union and Members United Corporate Federal Credit Union against RBS and eight other banks including Morgan Stanley MS, Barclays PLC BCS and Credit Suisse Group AG CS related to the sale of nearly $2.4 billion in mortgage-backed securities to the credit unions that suffered billions of dollars in losses.

With respect to the RBS case, NCUA accused the bank of providing misleading data in the Offering Documents related to the securities sold.  It was alleged that the documents contained misrepresentations regarding several material facts including loan originators’ compliance with underwriting guidelines.

In 2006 and 2007, Southwest Corporate and Members United paid over $300 million to RBS for the securities that were rated triple-A at the time. However, the NCUA claimed that the securities were risky investments and should not have been sold to the credit unions.

As both the credit unions became insolvent during the financial crisis, they were placed in the conservatorship of NCUA. Notably, the NCUA has now obtained over $1.9 billion in legal recoveries from several banks.

In connection with the latest settlement, NCUA Board Chairman Debbie Matz stated “NCUA has a statutory obligation to secure recoveries for credit unions and ensure that consumers remain protected. Matz further added "We can assure stakeholders that we will continue to aggressively pursue recoveries against Wall Street firms that contributed to the corporate crisis. Each recovery as well as our ongoing lawsuits further NCUA's goal of minimizing the losses of the corporate crisis and future costs to credit unions."

Bottom Line

The latest settlement reflects RBS’ efforts in gradually resolving the legal issues as the UK government proceeds in privatizing RBS, which was bailed out with £45 billion during the 2008 financial crisis. Notably, last month, the government raised £2.1 billion ($3.3 billion) from its first sale of 5.4% stake.  As the UK economy is gradually recovering from the global credit crunch, the government seems confident in privatizing RBS in which it currently holds around 72.9% stake.

We remain encouraged as the government backed banking giant is striving for growth with several restructuring initiatives that include cost reduction measures, increased focus on markets where it has a strong presence and long-term growth prospects, and improvement in its capital ratios.

RBS currently carries a Zacks Rank #3 (Hold).

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