RBS 2012 Annual Report Download - page 462

460
Notes on the consolidated accounts continued
32 Memorandum items continued
Securitisation and collateralised debt obligation business
In the United States, the Group is involved in reviews, investigations and
proceedings (both formal and informal) by federal and state governmental
law enforcement and other agencies and self-regulatory organisations
relating to, among other things, mortgage-backed securities,
collateralised debt obligations (CDOs), and synthetic products. In
connection with these inquiries, Group companies have received
requests for information and subpoenas seeking information about,
among other things, the structuring of CDOs, financing to loan
originators, purchase of whole loans, sponsorship and underwriting of
securitisations, due diligence, representations and warranties,
communications with ratings agencies, disclosure to investors, document
deficiencies, and repurchase requests.
In September and October 2010, the SEC requested voluntary production
of information concerning residential mortgage-backed securities (RMBS)
underwritten by subsidiaries of RBS during the period from September
2006 to July 2007 inclusive. In November 2010, the SEC commenced a
formal investigation. The investigation appears to be focused on certain
specific RMBS securitisations underwritten in 2007 and is continuing.
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 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.
US mortgages - loan repurchase matters
The Group’s Markets & International Banking N.A. or M&IB N.A. business
(formerly Global Banking & Markets 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). M&IB 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, M&IB 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, M&IB N.A. made such representations and warranties
itself. Where M&IB N.A. has given those or other representations and
warranties (whether relating to underlying loans or otherwise), M&IB 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, M&IB N.A. may be able to
assert claims against third parties who provided representations or
warranties to M&IB N.A. when selling loans to it; although the ability to
recover against such parties is uncertain. Between the start of 2009 and
the end of December 2012, M&IB N.A. received approximately US$606
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 M&IB N.A..
However, repurchase demands presented to M&IB N.A. are subject to
challenge and rebuttal by M&IB N.A..
RBS Citizens has not been an issuer or underwriter of non-agency
RMBS. However, RBS 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, RBS 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. Between the start of 2009 and the end of 2012, RBS
Citizens received US$141.9 million in repurchase demands in respect of
loans originated primarily since 2003. However, repurchase demands
presented to RBS Citizens are subject to challenge and rebuttal by RBS
Citizens.
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, RBS Citizens has not been
materially impacted by such disruptions and the Group has not ceased
making foreclosures.
The volume of repurchase demands is increasing and is expected to
continue to increase, and the Group cannot currently estimate what the
ultimate exposure of M&IB N.A. or RBS Citizens may be. 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 net assets, operating results or cash flows in any
particular period.