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Royal Bank of Scotland Settles Nevada Case Over Home Loans

The Royal Bank of Scotland agreed on Tuesday to pay $42.5 million to Nevada to settle an inquiry over lending practices during the housing boom.

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The Royal Bank of Scotland agreed to pay $42.5 million late Tuesday in a settlement with the Nevada attorney general that ends an 18-month investigation into the deep ties between the bank and two mortgage lenders during the housing boom Most of the money paid by R.B.S— $36 million — will be used to help distressed borrowers throughout NevadaIn addition, R.B.Sagreed to finance or purchase subprime loans in the future only if they comply with state laws and are not deceptive The settlement between the bank and Catherine Cortez Masto, Nevada’s attorney general, relates to conduct at Greenwich Capital, the R.B.Sunit that bundled mortgages into securities and sold them to investorsNevada found that R.B.Sworked closely with Countrywide Financial and Option One, two of the most aggressive lenders during the boom Officials working with MsMasto say that they examined R.B.S.’s activities from 2004 to 2007During those years, the bank provided funding for more than $100 billion of risky loans, many made by Countrywide and Option OneIn 2005 and 2006, R.B.Swas the third-largest securitizer of subprime mortgages and adjustable-rate loans “I remain committed to enforcing Nevada’s laws against the players — including those on Wall Street — that contributed to and profited from reckless and deceptive mortgage lending in Nevada,” MsMasto said in a statement“The payment from R.B.Swill alleviate some of the injury to the Silver State and its residentsThe changes to its securitization process should help make sure that we do not go down this road again.” In agreeing to the settlement, R.B.Sneither admitted nor denied the acusations During the investigation, Nevada officials examined more than one million pages of documents and interviewed former R.B.Semployees and borrowersMsMasto’s office concluded that the bank had essentially created joint ventures with Countrywide and Option One and that its financing enabled those lenders to make reckless loans that were unlikely to be repaid The attorney general also examined whether R.B.Sreviewed the mortgages bought from Countrywide and concluded that the bank bundled and sold loans even after identifying them as problematicMoreover, at Countrywide’s request, the bank limited the number of loans it reviewed, the attorney general’s office said Nevada has been hit hard by the foreclosure crisisSome 60 percent of borrowers in the state have mortgages of greater value than the properties underlying them, according to Core Logic, a real estate data company MsMasto’s case comes after several others brought recently by state regulators against firms involved in mortgage securitiesEarlier this month, the New York attorney general sued Bear Stearns over its conduct during the boom, and last week, the Massachusetts securities regulator sued Putnam Advisory, a unit of Putnam Investments, for misleading investors who bought a collateralized debt obligation it was managingOfficials at both firms rejected the allegations and said they would vigorously defend themselves in court Some securities lawyers say that it is easier for state officials to bring successful actions against banks for questionable activities than it is for federal investigatorsThat is mostly because of stringent requirements under federal securities laws “This strategy sidesteps the need to prove intent to defraud and to detail fraud allegations as is required for similar actions under the federal securities laws,” said Lewis D. Lowenfels, an authority in securities law in New YorkAccording to the Nevada attorney general’s office, R.B.Swas among the larger bundlers of a risky type of loan known as a pay-option adjustable-rate mortgageFrom 2004 through 2006, R.B.Spackaged $90 billion of these loans, many originated by CountrywideThe mortgages typically began with an artificially low interest rate that rose significantly after a year or twoUnder the terms of these loans, borrowers could choose to pay only a fraction of what they owed monthly, resulting in a rising principle balance R.B.Salso worked hard to keep Countrywide generating loans for the bank’s securities, investigators said MsMasto’s office said that R.B.S.’s mortgage funding operation was widespread across Nevada, which is why most of the settlement will go to borrowers who have suffered harm A version of this article appeared in print on October 24, 2012, on page B3 of the New York edition with the headline: Bank Settles Over Loans In Nevada. Get Free E-mail Alerts on These Topics Mortgages Mortgage-Backed Securities Subprime Mortgage Crisis Royal Bank of Scotland PLC google_hints="Bank Settles Over Loans in Nevada";google_ad_channel="archive, archive_business, archive_Business Day"; // Sponlink_A_Short if (document.getElementById("MiddleRight")) { google_targeting = 'content'; } NYTD.GoogleAds.getGoogleAds("AFC", { google_ad_client:'nytimes_article_var', ad_target_list:'sponLinkA' });   Inside Health » Too Hot to Handle Arts » The Harmony of Liberty Opinion » Should Beach Privatization Be Allowed? Room for Debate asks whether shorefront homeowners should have to open their land to all comers. 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