Investment bank Morgan Stanley has agreed a $3.2 billion settlement with the New York Attorney General, Eric Schneiderman over the bank’s deceptive practices, in respect of residential mortgage-backed securities (RMBS ), leading up to the 2008 financial crisis.

The investigation found  that during 2006 the bank deceived investors about the quality of the mortgage loans it securitised and sold to investors, and its process for screening out questionable loans. In fact Morgan Stanley securitised and sold RMBS with underlying mortgage loans that it knew had material defects.

The settlement includes $550 million – $400 million worth of consumer relief and $150 million in cash – that will be allocated to New York State. Morgan Stanley will be required to provide community-level relief to New Yorkers, including loan reductions to help residents avoid foreclosure, and funds to spur the construction of more affordable housing. Additional resources will be dedicated to helping communities transform their code enforcement systems, invest in land banks, and purchase distressed properties to keep them out of the hands of predatory investors.

The settlement was negotiated through the Residential Mortgage-Backed Securities Working Group, a joint state and federal working group formed in 2012 to share resources and continue investigating wrongdoing in the mortgage-backed securities market prior to the financial crisis.

Schneiderman  said the agreement was "another victory in our efforts to help New Yorkers rebuild in the wake of the financial devastation caused by major banks,” and would keep residents in their homes and help to build more affordable housing in New York state.