HSBC 2011 Annual Report Download - page 410

HSBC HOLDINGS PLC
Notes on the Financial Statements (continued)
44 – Legal proceedings and regulatory matters
408
It has been announced that the five largest US mortgage servicers (not including HSBC) have reached a settlement
with the DoJ, the US Department of Housing and Urban Development and State Attorneys General of 49 states with
respect to foreclosure and other mortgage servicing practices. HNAH, HSBC Bank USA and HSBC Finance have
had preliminary discussions with bank regulators and other governmental agencies regarding a potential resolution,
although the timing of any settlement is not presently known. Based on discussions to date, HSBC recognised
provisions of US$257m in the fourth quarter of 2011 to reflect the estimated liability associated with a proposed
settlement of this matter. Any such settlement, however, may not completely preclude other enforcement actions by
state or federal agencies, regulators or law enforcement bodies related to foreclosure and other mortgage servicing
practices, including, but not limited to matters relating to the securitisation of mortgages for investors, including the
imposition of civil money penalties, criminal fines or other sanctions. In addition, such a settlement would not
preclude private litigation concerning these practices.
Participants in the US mortgage securitisation market that purchased and repackaged whole loans have been the
subject of lawsuits and governmental and regulatory investigations and inquiries, which have been directed at groups
within the US mortgage market, such as servicers, originators, underwriters, trustees or sponsors of securitisations,
and at particular participants within these groups. As the industry’s residential mortgage foreclosure issues continue,
HSBC Bank USA has taken title to an increasing number of foreclosed homes as trustee on behalf of various
securitisation trusts. As nominal record owner of these properties, HSBC Bank USA has been sued by municipalities
and tenants alleging various violations of law, including laws regarding property upkeep and tenants’ rights. While
HSBC believes and continues to maintain that the obligations at issue and the related liability are properly those of
the servicer of each trust, HSBC continues to receive significant and adverse publicity in connection with these and
similar matters, including foreclosures that are serviced by others in the name of ‘HSBC, as trustee’.
HSBC Bank USA and HSBC Securities (USA) Inc. have been named as defendants in a number of actions in
connection with residential mortgage-backed securities (‘RMBS’) offerings, which generally allege that the offering
documents for securities issued by securitisation trusts contained material misstatements and omissions, including
statements regarding the underwriting standards governing the underlying mortgage loans. These include an action
filed in September 2011 by the Federal Housing Finance Agency. This action is one of a series of similar actions filed
against 17 financial institutions alleging violations of federal securities laws and state statutory and common law in
connection with the sale of private-label RMBS purchased by Fannie Mae and Freddie Mac, primarily from 2005 to
2008.
HSBC Bank USA has received subpoenas from the Securities and Exchange Commission (‘SEC’) seeking production
of documents and information relating to its involvement and the involvement of its affiliates in specified private-
label RMBS transactions as an issuer, sponsor, underwriter, depositor, trustee, custodian or servicer. HSBC Bank
USA has also had preliminary contacts with other government authorities exploring the role of trustees in private
label RMBS transactions. HSBC Bank USA also received a subpoena from the US Attorney’s Office, Southern
District of New York seeking production of documents and information relating to loss mitigation efforts with respect
to residential mortgages in the State of New York and a Civil Investigative Demand from the Massachusetts State
Attorney General seeking documents, information and testimony related to the sale of RMBS to public and private
customers in the State of Massachusetts from January 2005 to the present.
HSBC expects this level of focus will continue and, potentially, intensify, so long as the US real estate markets
continue to be distressed. As a result, HSBC Group companies may be subject to additional litigation and
governmental and regulatory scrutiny related to its participation in the US mortgage securitisation market, either
individually or as a member of a group. HSBC is unable to estimate reliably the financial effect of any action or
litigation relating to these matters. As situations develop it is possible that any related claims could be significant.
Other US regulatory and law enforcement investigations
In October 2010, HSBC Bank USA entered into a consent cease and desist order with the Office of the Comptroller
of the Currency and the indirect parent of that company, HNAH, entered into a consent cease and desist order with
the Federal Reserve Board. These actions require improvements for an effective compliance risk management
programme across the Group’s US businesses, including US Bank Secrecy Act (‘BSA’) and Anti Money Laundering
(‘AML’) compliance. Steps continue to be taken to address the requirements of these Orders to ensure compliance,
and that effective policies and procedures are maintained.
The AML/BSA consent cease and desist orders do not preclude additional enforcement actions against HSBC Bank
USA or HNAH by bank regulatory or law enforcement agencies, including the imposition of civil money penalties,