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HSBC agrees to $765 million settlement with DOJ over pre-crisis mortgages

Plus $26.8 million settlement with Massachusetts

HSBC is on the verge of paying a $765 million fine to settle allegations into its mortgage bond activities in the run-up to the housing crisis.

The London-based bank revealed Monday that it recently agreed to a “settlement-in-principle” with the Department of Justice that would see the bank pay a $765 million civil penalty that would resolve an investigation into the bank’s mortgage origination and securitization activities from 2005 to 2007.

The settlement agreement comes just over a year since rumors first began circulating that the bank was in settlement talks with the DOJ over its “legacy” residential mortgage-backed securities activities.

According to the bank, it reached the tentative settlement agreement last month, but the bank cautions that the settlement is not finalized.

“The settlement-in-principle is subject to the negotiation of definitive documentation, and there can be no assurance that HSBC and the DoJ will agree on the final documentation,” the bank said in a regulatory filing.

The settlement with the DOJ, if it comes to fruition, would be the bank’s second nine-figure settlement with the U.S. over its pre-crisis actions.

Back in February 2016, HSBC agreed to a $601 million settlement with a series of federal agencies and nearly every state over charges that the bank engaged in mortgage origination, servicing and foreclosure abuses.

At the same time, the Federal Reserve announced that HSBC will pay $131 million to settle similar claims.

An HSBC spokesperson confirmed that the bank has reached a settlement in principle with the DOJ, but said that the bank will not be commenting beyond what is in the release.

The DOJ said that it will not be commenting on the matter.

Additionally, the bank said that it reached a settlement agreement with the Massachusetts Attorney General over the state’s investigations into the bank’s mortgage securitization activities during the same time period.

While HSBC did not provide any details on the nature of either of the new settlements, the state of Massachusetts issued a release on Monday that confirms the bank’s settlement with the state.

According to the office of Massachusetts Attorney General Maura Healey, HSBC will pay $26.8 million to settle allegations that the bank “purchased and securitized unfair residential mortgage loans” that were in violation of state law.

Healey’s office states that HSBC did not originate the subprime loans in question, but did purchase the loans from lenders and securitize them.

In a statement, Healey’s office said that HSBC’s activities caused harm to Massachusetts residents.

“HSBC’s securitization practices contributed to a financial crisis that deeply harmed Massachusetts communities and caused families to lose their homes,” Healey said. “We will continue to help consumers who were sold toxic mortgages by these banking institutions and are pleased that this settlement will provide significant relief for families that have suffered harm from unsustainable subprime loans.”

Healey’s office alleged “many of these loans were presumptively unfair under Massachusetts law because they had debt-to-income ratios over 50%, included substantial prepayment penalties, had loan-to-value ratios over 97%, and included other problematic features.”

Under the terms of the settlement, HSBC will pay $5 million to the state along with compensating governmental entities that “allegedly suffered harm” from HSBC’s actions, including cities and towns like Brockton, Lawrence, Lowell, Lynn, Springfield, and Worcester that incurred additional expenses due to the foreclosures caused by the loans in question.

According to Healey’s office, the remaining $20 million will go to eligible homeowners for principal reductions and related payments and to assist borrowers who were foreclosed on.

But as the bank notes, both settlements do not provide protection to further legal or regulatory activities brought by other parties.

“The settlement-in-principle with the DOJ and resolution with the Massachusetts Attorney General do not preclude litigation brought by other parties and HSBC may be subject to additional claims, litigation and governmental or regulatory scrutiny relating to its participation in the U.S. mortgage securitisation market,” the bank stated in its filing.

[Update: This article is now updated with additional confirmation from HSBC about the pending settlement with the DOJ, along with a response from the DOJ.]

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