HSBC 2015 Annual Report Download - page 450

Notes on the Financial Statements (continued)
40 – Legal proceedings and regulatory matters
HSBC HOLDINGS PLC
448
various Madoff-related proceedings is up to or exceeding $800m. Due to uncertainties and limitations of this estimate, the
ultimate damages could differ significantly from this amount.
US mortgage-related investigations
In April 2011, following completion of a broad horizontal review of industry foreclosure practices, HSBC Bank USA N.A. (‘HSBC
Bank USA’) entered into a consent cease-and-desist order with the Office of the Comptroller of the Currency (‘OCC’), and HSBC
Finance Corporation (‘HSBC Finance’) and HSBC North America Holdings Inc. (‘HNAH’) entered into a similar consent order with
the Federal Reserve Board (‘FRB’) (together with the OCC order, the ‘Servicing Consent Orders’). The Servicing Consent Orders
require prescribed actions to address the foreclosure practice deficiencies noted in the joint examination and described in the
Servicing Consent Orders. HSBC Bank USA, HSBC Finance and HNAH continue to work with the OCC and the FRB to align their
processes with the requirements of the Servicing Consent Orders and to implement operational changes as required; however,
as set forth in a June 2015 amended consent order between HSBC Bank USA and the OCC (the ‘Amended Consent Order’),
HSBC Bank USA is not yet in compliance with all of the requirements of the OCC order. A failure to satisfy all requirements of
the OCC order may result in a variety of regulatory consequences for HSBC Bank USA, including the imposition of civil money
penalties. The Amended Consent Order includes business restrictions related to residential mortgage servicing that will remain
in place until the OCC order is terminated. The restrictions include a prohibition against the bulk acquisition of residential
mortgage servicing or residential mortgage servicing rights and a requirement to seek OCC supervisory non-objection to
outsource any residential mortgage servicing activities that are not already outsourced as of the date of the Amended Consent
Order.
The Servicing Consent Orders required an independent review of foreclosures pending or completed between January 2009
and December 2010 to determine if any borrower was financially injured as a result of an error in the foreclosure process (the
‘Independent Foreclosure Review’). As required by the Servicing Consent Orders, an independent consultant was retained to
conduct that review. In February 2013, HSBC Bank USA entered into an agreement with the OCC, and HSBC Finance and HNAH
entered into an agreement with the FRB (together, the ‘IFR Settlement Agreements’), pursuant to which the Independent
Foreclosure Review ceased and was replaced by a broader framework under which HSBC and 12 other participating servicers
agreed to provide, in the aggregate, over $9.3bn in cash payments and other assistance to help eligible borrowers. Pursuant to
the IFR Settlement Agreements, HNAH made a cash payment of $96m into a fund used to make payments to borrowers that
were in active foreclosure during 2009 and 2010 and is also providing other assistance, such as loan modifications, to help
eligible borrowers. Borrowers who receive compensation will not be required to execute a release or waiver of rights and will
not be precluded from pursuing litigation concerning foreclosure or other mortgage servicing practices. For participating
servicers, including HSBC Bank USA and HSBC Finance, fulfilment of the terms of the IFR Settlement Agreements will satisfy
the Independent Foreclosure Review requirements of the Servicing Consent Orders, including the wind-down of the
Independent Foreclosure Review.
The Servicing Consent Orders do not preclude additional enforcement actions against HSBC Bank USA, HSBC Finance or HNAH
by regulatory, governmental or law enforcement agencies, such as the DoJ or state Attorneys General, which could include the
imposition of civil money penalties and other sanctions relating to the activities that are the subject of the Servicing Consent
Orders. In addition, the IFR Settlement Agreements do not preclude future private litigation concerning these practices.
Separate from the Servicing Consent Orders and the settlement related to the Independent Foreclosure Review discussed
above, in February 2016, HSBC Bank USA, HSBC Finance, HSBC Mortgage Services Inc. and HNAH entered into an agreement
with the DoJ, the US Department of Housing and Urban Development, the Consumer Financial Protection Bureau, other
federal agencies (the ‘Federal Parties’) and the Attorneys General of 49 states and the District of Columbia (the ‘State Parties’)
to resolve civil claims related to past residential mortgage loan origination and servicing practices (the ‘National Mortgage
Settlement Agreement’). The National Mortgage Settlement Agreement is similar to prior settlements reached with other US
mortgage servicers and includes payment of $100m to be allocated among participating Federal and State Parties, and $370m
in consumer relief provided through HSBC’s loan modification programmes. The National Mortgage Settlement Agreement
also sets forth national mortgage servicing standards to which HSBC will adhere.
In addition, in February 2016, the FRB announced the imposition against HSBC Finance and HNAH of a $131m civil money
penalty in connection with the FRB’s Servicing Consent Order of April 2011. Pursuant to the terms of the FRB order, the
penalty will be satisfied by the cash payments made to the Federal Parties and the consumer relief provided pursuant to the
National Mortgage Settlement Agreement.
The National Mortgage Settlement Agreement and the FRB order do not completely preclude other enforcement actions by
regulatory, governmental or law enforcement agencies related to foreclosure and other mortgage servicing practices,
including, but not limited to, matters relating to the securitisation of mortgages for investors, which could include the
imposition of civil money penalties, criminal fines or other sanctions. In addition, these practices have in the past resulted in
private litigation, and the National Mortgage Settlement Agreement would not preclude further private litigation concerning
these practices.
US mortgage securitisation activity and litigation
HSBC Bank USA was a sponsor/seller of loans used to facilitate whole loan securitisations underwritten by HSBC Securities
(USA) Inc. (‘HSI’). From 2005 to 2007, HSBC Bank USA purchased and sold $24bn of such loans to HSI, which were subsequently