Risk & Compliance

HSBC to Pay $765M in Toxic RMBS Settlement

The Department of Justice says bank employees ignored the warnings of its primary due diligence vendor about the quality of loans underlying its RMBS.
Matthew HellerOctober 11, 2018

HSBC has agreed to pay $765 million to settle U.S. allegations that it sold toxic residential mortgage-backed securities before the financial crisis, resulting in “significant losses” to investors.

In announcing the deal on Tuesday, the Department of Justice said the London-based bank misrepresented the quality of its RMBS to investors and the due diligence procedures it claimed it would use to ensure that quality.

According to the DoJ, HBSC touted its due diligence process to investors but its employees allegedly ignored the warnings of its primary due diligence vendor, which, between January 2006 and June 2007, flagged more than one out of every four loans it planned to securitize as having low grades.

“When HSBC employees saw loans with low grades, they sometimes ‘waived’ those loans through or recategorized the grades to make the due diligence ‘percentages look better,’” the department said in a news release.

HSBC entered into the settlement — which is substantially lower than the billions paid by other banks accused of RMBS-related misconduct — without admitting liability.

“HSBC chose to … put lots of defective mortgages into its deals,” Bob Troyer, U.S. Attorney for the District of Colorado, said in a news release. “When HSBC saw problems, it chose to rush those deals out the door. When deals went south, investors who trusted HSBC suffered.”

As early as 2005, the DoJ said, an HSBC credit risk manager expressed concerns with the bank’s due diligence process. Other employees were critical of the deals they were issuing.

“For example, in 2007, an HSBC trader said, in reference to an RMBS that HSBC was about to issue, ‘it will suck,’” according to the department.

In one case of alleged wrongdoing, the bank’s head of risk management for residential mortgage-backed securities wrote in an email that a high rate of early defaults on the loans in a pool purchased in 2006 could indicate systemic problems with the pool.

But the next day, the head of HSBC’s whole loan trading risk management group said he was “comfortable that we need not make any further disclosures to investors,” the government said.