U.S. Regulators Tell RBS It Faces $13B Mortgage Penalty

U.S. regulators have told Royal Bank of Scotland Group it could pay as much as $13 billion if it loses a lawsuit over its handling of mortgage securities.

The Federal Housing Finance Agency, suing in a Connecticut court on behalf of government-owned lenders Fannie Mae and Freddie Mac, made the estimate in a June 24 court filing in a related case in Manhattan federal court. A spokesman for RBS, which is seeking to have the case dismissed, arguing the suit filed in 2011 came too late, declined to comment.

The prospect of a large U.S. fine comes as Chancellor George Osborne prepares to sell shares in RBS as early as September at a loss to the U.K. Treasury. A settlement is expected to be "substantial" and could come this year, RBS Chief Executive Officer Ross McEwan has said.

The $13 billion sum marks the first time the FHFA has attached a potential value to its case against RBS in U.S. District Court in New Haven, Conn., and outstrips previous estimates. The London Times reported in January Edinburgh-based RBS could face fines of more than 5 billion pounds ($7.8 billion) over its sale of $32 billion of residential mortgage-backed securities.

RBS overstated the ability of borrowers to repay the underlying mortgage loans when it sold the securities from 2005 to 2007, using false and misleading documentation, the FHFA said in the Connecticut filing.

The bank will probably reach a deal with the FHFA before the case goes to trial, and at a lower price tag, said Elliott Stein, an analyst for Bloomberg Intelligence. He kept his estimate for a settlement at $1.8 billion to $4.5 billion.

The FHFA arrived at the potential value of the Connecticut case using a previous $806 million mortgage securities judgment in May against RBS and Nomura Holdings Inc. in the U.S. District Court for the Southern District of New York. The banks are appealing the verdict.

Using that case as a "rough reference point, that extrapolates to a judgment in the Connecticut action of nearly $13 billion," the FHFA wrote in a document linked to its New York case.

RBS also faces a Justice Department probe over the sale of the mortgage securities that may lead to a fine of about $2 billion in the next three months, according to Chirantan Barua, an analyst at Sanford C. Bernstein Ltd. in London.

No trial date has been set for the FHFA's Connecticut case, and it probably won't come before the end of the second half of 2016, Stein said.