RBS 2011 Annual Report Download - page 409

RBS Group 2011 407
Also in October 2010, the SEC commenced an inquiry into document
deficiencies and repurchase requests with respect to certain
securitisations, and in January 2011, this was converted to a formal
investigation. Among other matters, the investigation seeks information
related to document deficiencies and remedial measures taken with
respect to such deficiencies. The investigation also seeks information
related to early payment defaults and loan repurchase requests.
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 RBSG subsidiary, seeking
information related to residential mortgage lending practices and sales
and securitisation of residential mortgage loans. On 28 November 2011,
an Assurance of Discontinuance between RBS Financial Products Inc.
and the Massachusetts Attorney General was filed in Massachusetts
State Court which resolves the Massachusetts Attorney General's
investigation as to RBSG. The Assurance of Discontinuance required
RBS Financial Products Inc. to make payments totalling approximately
US$52 million.
In 2007, 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 from the independent
firms hired to perform due diligence on mortgages. The Group completed
its production of documents requested by the New York State Attorney
General in 2008, principally producing documents related to loans that
were pooled into one securitisation transaction. In May 2011, at the New
York State Attorney General's request, representatives of the Group
attended an informal meeting to provide additional information about the
Group's mortgage securitisation business. The investigation is ongoing
and the Group continues to provide requested information.
In September 2010, RBSG 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 State Attorney General is in the early stages
and therefore it is difficult to predict the potential exposure from any such
investigation.
US mortgages - Loan Repurchase Matters
The Group’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
recover against such parties is uncertain. Since January 2009, GBM N.A.
has received approximately US$75 million in repurchase demands in
respect of loans made primarily from 2005 to 2008 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.
Citizens has not been an issuer or underwriter of non-agency RMBS.
However, Citizens 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, Citizens 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. Since January 2009, Citizens has received
approximately US$41.2 million in repurchase demands in respect of
loans originated primarily since 2003. However, repurchase demands
presented to Citizens are subject to challenge and, to date, Citizens 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, Citizens 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 Citizens may be, and cannot give
any assurance that the historical experience will continue in the future. It
is possible that the volume of repurchase demands will increase in the
future. Furthermore, the Group is unable to estimate the extent to which
the matters described above will impact it and future developments may
have an adverse impact on the Group’s consolidated net assets,
operating results or cash flows in any particular period.