HSBC will pay $765 million to settle claims related to its securitization, issuance, and marketing of residential mortgage-backed securities (RMBS) between 2005 and 2007. In an action brought under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, the Colorado U.S. Attorney’s Office alleged that HSBC misrepresented the quality of its RMBS, used a flawed due diligence process for reviewing the loans underlying the RMBS, and made misrepresentations regarding its due diligence efforts to investors. HSBC disputes and does not admit the allegations.
"HSBC chose to use a due diligence process it knew from the start didn’t work," said Bob Troyer, United States Attorney for the District of Colorado.
The government alleged that HSBC had a due diligence process in place for reviewing the loans it planned to securitize as RMBS but was aware of issues in the process. Specifically, HSBC allegedly told investors HSBC would review at least 25 percent of the purchased subprime loans in the pool for credit and compliance and that it selected 20 percent of the loan pool as an "adverse sample." However, according to the government, with regard to some loan pools, HSBC’s RMBS trading desk influenced how loans were selected.
In addition, the government alleged that HSBC’s primary due diligence vendor flagged almost 7,500 loans as low grade and that HSBC employees sometimes "waived" the loans through or recategorized grades to make the due diligence numbers "look better." In 2006, HSBC purchased a loan pool that its risk management group said "may be contaminated" but went ahead with issuing the securitization and later bought and securitized additional loans from the same originator, the government alleged.
"It chose to put lots of defective mortgages into its deals. When HSBC saw problems, it chose to rush those deals out the door. When deals went south, investors who trusted HSBC suffered," Troyer stated.
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