The federal government has filed lawsuits against nine major lenders over allegations they sold bad mortgages to two credit unions.
The National Credit Union Administration is suing JPMorgan Chase, Morgan Stanley, Barclays, the Royal Bank of Scotland, Credit Suisse, UBS, Wells Fargo, Goldman Sachs and Ally Financial. The suits allege that the banks sold $2.4bn in bad mortgage-backed securities to the Southwest and Members United corporate credit unions, both of which later failed.
“We continue to pursue accountability and recovery in the wake of billions of dollars in sales of faulty securities that led to the collapse of several corporate credit unions and handed the industry the costly bill of paying for the losses,” NCUA Board Chair Debbie Matz said Monday. “All the credit unions we supervise and insure are sharing those costs. The people who are responsible should be required to shoulder that burden, as well.”
The NCUA alleges that the banks misrepresented the underwriting of mortgage-backed securities sold to the credit unions.
“The originators systematically abandoned the stated underwriting guidelines in the offering documents … with the result that the securities were significantly riskier than represented,” the NCUA said in a statement Monday.
The credit unions failed, were placed in NCUA conservatorship, and finally liquidated. “As liquidating agent for Southwest and Members United corporate credit unions, NCUA has a statutory duty to seek recoveries from responsible parties in order to minimize the cost of any failure to its insurance funds and the credit union industry,” the NCUA said.
The agency has already recovered $335 million in earlier litigation against Deutsche Bank, Bank of America, Citigroup and HSBC, CNN reported.
Any money recovered in NCUA’s suit against the banks would go into the Temporary Corporate Credit Union Stabilization Fund, which insures the money of customers of corporate credit unions.
The fund’s assets are raised by assessments on all federally insured credit unions, which means further settlement awards would reduce credit unions’ liability – an idea the National Association of Federal Credit Unions finds appealing. In a statement released Tuesday, NAFCU President and CEO Dan Berger praised the NCUA’s decision to file suit against the banking giants.
“We urge the agency to leave no stone unturned in its effort to help reduce the costs insured credit unions will ultimately bear,” Berger said.