CUNA Sues RBS Securities Over Nonprime PLS

CUNA Mutual Group this week filed suit against RBS Securities, asking a federal court in Madison, Wisc. to order the Wall Street bank to buy back $72 million of failed residential MBS it sold to the credit union insurer’s MEMBERS’s Life Insurance Co., and CUMIS Insurance Society units.

The suit, originally filed in state court but removed to the U.S. District Court for the Western District of Wisconsin, claims the Wall Street bank packed 10 RMBS containing 15 certificates with subprime mortgages originated by five lenders that have since failed.

CUNA charges RBS inflated the value of the mortgages in order to sell them to investors.

The lenders in question include: Washington Mutual, First Magnus Financial Corp., Delta Funding, New Century Mortgage Corp., and Fremont Investment Loan. All filed for bankruptcy, except WaMu which was taken over by federal banking regulators.

In its suit, CUNA Mutual claims the lenders made misrepresentations to RBS about the loan underwriting standards and the nature of the collateral backing the loans, which the Wall Street bank is adjudicating on its own with the remnants of those lenders.

Those misrepresentations led RBS to misstate the value of the MBS, which was based on erroneous loan-to-value ratios and owner-occupancy ratios, among other things, according to CUNA Mutual, which is seeking to exercise the rescission clause in the sale of the MBS.

“RBS’s representations regarding the underwriting processes, underwriting quality, loan selection, credit enhancements, use of exceptions and ratings were all false,” claims CUNA Mutual. “The mortgage loans underlying CUNA Mutual’s certificates did not comply with the underwriting standards described in the Offering Documents because those standards were systemically ignored.”

The claims are similar to those alleged by NCUA in a suit it has filed against RBS Securities for its sale of $1.1 billion of MBS to WesCorp FCU, the one-time $34 billion corporate credit union that failed in 2009 amid $7 billion of losses. NCUA has also filed similar civil suits in the failure of the corporate credit unions against other Wall Street banks, including Goldman Sachs, JP Morgan Chase and Wachovia Securities, which is now a unit of Wells Fargo Co.

CUNA Mutual makes clear it is not alleging that RBS intentionally or knowingly misrepresented the quality of the loans in the pools backing the RMBS, “but RBS’s misrepresentation, even if negligently or innocently made, entitle CUNA Mutual Group to rescind its purchases of the 15 certificates,” said the credit union insurer in its suit.

Lawyers for RBS Securities, did not immediately return a phone call seeking comment. CUNA Mutual also did not respond to request for comment.

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