Connecticut RBS Securities is to pay $120 million to the state of Connecticut to resolve an investigation into its underwriting of residential mortgage-backed securities in the lead-up to the financial crisis that began in 2008.

Between January 2005 and December 2008, RBS served as the leading underwriter for approximately 250 residential mortgage-back security deals valued at $250 billion. As lead underwriter, it was required to conduct ‘due diligence’ on the pools of residential mortgage loans that collateralised its deals. The purpose of this was to ensure that representations made to the public and potential investors about the securities were accurate and complete.

The state alleged that RBS's ‘due diligence’ process was inadequate and resulted in omissions and misstatements in the representations that the firm made to the public and investors about the securities. The state alleged that, on one or more occasions, many loans deviated so greatly from underwriting guidelines that they should have been excluded from the loan pools, yet they were not. In some cases, in the state’s eyes, RBS's own third-party vendors (who conducted an independent review of the loans) gave low grades to certain loans, but RBS regraded them at a higher level and included the loans in the pools.

The state alleged that RBS made representations in its prospectus materials indicating that all mortgage loans were subject to ‘due diligence,’ that portfolios received thorough credit and compliance reviews and that loans would not be included in RMBS deals if RBS became aware of anything that would cause it to believe that the loan did not meet underwriting guidelines or quality standards. The state alleged that RBS's conduct was dishonest and/or unethical and that RBS made untrue statements in representing its securities products.

RBS was one of the main players in the mortgage-backed securities business at the time, underwriting securities that have suffered more than $40 billion in losses to date.