RBS 2010 Annual Report Download - page 374

34 Memorandum items continued
Securitisation and collateralised debt obligation business
In September and October 2010, the SEC requested voluntary production
of information concerning residential mortgage backed securities
underwritten by subsidiaries of RBS Group during the period from
September 2006 to July 2007 inclusive. In November 2010, the SEC
commenced formal proceedings and requested testimony from RBS
employees. The investigation is in its preliminary stages and it is difficult
to predict any potential exposure that may result.
In June 2009, in connection with an investigation into the role of
investment banks in the origination and securitisation of sub prime loans
in Massachusetts, the Massachusetts Attorney General issued
subpoenas to various banks, including an RBS Group subsidiary, seeking
information related to residential mortgage lending practices and sales
and securitisation of residential mortgage loans. This investigation is
ongoing and RBS Group is co-operating.
Previously, in 2008, the New York State Attorney General issued
subpoenas to a wide array of participants in the securitisation and
securities industry, focusing on the information underwriters obtained as
part of the due diligence process from the independent due diligence
firms. RBS Group completed its production of documents requested by
the New York State Attorney General in 2009, principally producing
documents related to loans that were pooled into one securitisation
transaction. More recently, in September 2010, RBS Group subsidiaries
received a request from the Nevada State Attorney General requesting
information related to securitisations of mortgages issued by three
specific originators. The investigation by the Nevada Attorney General is
in the early stages and therefore it is difficult to predict the potential
exposure from any such investigation. RBS Group and its subsidiaries
are co-operating with these various investigations and requests.
US mortgages
RBS's Global Banking & Markets N.A. (GBM N.A.), has been a purchaser
of non-agency US residential mortgages in the secondary market, and an
issuer and underwriter of non-agency residential mortgage backed
securities (RMBS). GBM N.A. did not originate or service any US
residential mortgages and it was not a significant seller of mortgage loans
to government sponsored enterprises (GSEs) (e.g. the Federal National
Mortgage Association and the Federal Home Loan Mortgage Association).
In issuing RMBS, GBM N.A. generally assigned certain representations
and warranties regarding the characteristics of the underlying loans made
by the originator of the residential mortgages; however, in some
circumstances, GBM N.A. made such representations and warranties
itself. Where GBM N.A. has given those or other representations and
warranties (whether relating to underlying loans or otherwise), GBM N.A.
may be contractually required to repurchase such loans or indemnify
certain parties against losses for certain breaches of such
representations and warranties. In certain instances where it is required
to repurchase loans or related securities, GBM N.A. may be able to
assert claims against third parties who provided representations or
warranties to GBM N.A. when selling loans to it; although the ability to
make recoveries against such parties and outcome of such claims would
be uncertain. During the two-year period ended 31 December 2010, GBM
N.A. has received approximately US$38 million in repurchase demands
in respect of loans made and related securities sold where obligations in
respect of contractual representations or warranties were undertaken by
GBM N.A. However, repurchase demands presented to GBM N.A. are
subject to challenge and, to date, GBM N.A. has rebutted a significant
percentage of these claims.
GBM N.A. has been named as a defendant in a number of suits relating
to its role as issuer and underwriter of RMBS (see section above ‘other
securitisation and securities related litigation in the United States’). Those
lawsuits are in their early stages and we are not able to predict the
outcome of such proceedings or their effect on the Group.
Citizens Financial Group (CFG) has not been an issuer or underwriter of
non-agency RMBS. However, CFG is an originator and servicer of
residential mortgages, and it routinely sells such mortgage loans in the
secondary market and to GSEs. In the context of such sales, CFG makes
certain representations and warranties regarding the characteristics of
the underlying loans and, as a result, may be contractually required to
repurchase such loans or indemnify certain parties against losses for
certain breaches of the representations and warranties concerning the
underlying loans. During the two-year period ended 31 December 2010,
CFG has received approximately US$26 million in repurchase demands
in respect of loans originated. However, repurchase demands presented
to CFG are subject to challenge and, to date, CFG has rebutted a
significant percentage of these claims.
Although there has been disruption in the ability of certain financial
institutions operating in the United States to complete foreclosure
proceedings in respect of US mortgage loans in a timely manner (or at all)
over the last year (including as a result of interventions by certain states
and local governments), to date, CFG has not been materially impacted
by such disruptions and the Group has not ceased making foreclosures.
The Group cannot estimate what the future level of repurchase demands
or ultimate exposure of GBM N.A. or CFG may be, and cannot give any
assurance that the historical experience will continue in the future.
Furthermore, the Group is unable estimate the extent to which the
matters described above will impact it and future developments may have
an adverse impact on the Group’s business, financial condition, results of
operations, cash flow and the value of its securities.
RBS Group 2010372
Notes on the accounts continued