UBS agrees to pay $1.4B to settle RMBS fraud case

Swiss bank UBS AG announced Monday it has agreed to pay $1.43 billion in penalties to settle a civil action alleging misconduct related to the underwriting, issuance and sale of residential mortgage-backed securities (RMBS) before the 2008 financial crisis. 

The settlement with the U.S. Department of Justice (DOJ), which refers to a civil action filed in November 2018, does not bring the determination of liabilities, the DOJ said. 

“The settlement has been fully provisioned in prior periods,” UBS said in a statement.  

According to the DOJ, the United States filed a complaint alleging that UBS “defrauded investors” by making false and misleading statements to buyers of 40 RMBS issued in 2006 and 2007 relating to the characteristics of the loans. 

Per the civil action, UBS knew that a significant number of the mortgages did not comply with underwriting guidelines designed to assess borrowers’ ability to repay and with consumer protection laws. In addition, UBS knew that property values associated with the loans were unsupported, the DOJ claimed. 

“UBS was allegedly aware of these significant problems because it had conducted extensive due diligence on the underlying loans prior to the RMBS being issued to determine whether the loans were consistent with representations that would be made to investors. Ultimately, the 40 RMBS sustained substantial losses,” the DOJ said in a statement. 

“The substantial civil penalty in this case serves as a warning to other players in the financial markets who seek to unlawfully profit through fraud that we will hold them accountable no matter how long it takes,” U.S. Attorney Breon Peace for the Eastern District of New York said in a statement. 

The UBS settlement is the last case brought by the DOJ working group dedicated to investigating the banks’ conduct during the financial crisis, which resulted in $36 billion in penalties to banks, originations and rating agencies. It includes Ally Financial; Aurora Loan Services; Bank of America; Barclays; Citigroup; Credit Suisse; Deutsche Bank; General Electric; Goldman Sachs; HSBC; JPMorgan; Moody’s; Morgan Stanley; Nomura; Royal Bank of Scotland; S&P; Société Générale; and Wells Fargo. 

The agreement comes as UBS is working to integrate the operations of Credit Suisse Group AG. It acquired the rival this year for $3.4 billion in stock after Credit Suisse faced a deposit run in March. A recent filing from UBS showed the Swiss bank took a hit of about $17 billion due to the takeover.

In the mortgage space, UBS has plans to wind down a business in its U.S. mortgage unit that focuses on “to-be-announced” (TBA) trading. The decision is part of UBS’s strategy to focus more on financing mortgage originators, per a Bloomberg report from May.