CUNAMutual Insurance Society, CUMIS Insurance Society and MEMBERS Life Insurance Co., havefiled suit against RBS Securities Inc. claiming that the firm madefalse representations of its offering documents at the time thatmore than a dozen residential mortgage-backed securities werepurchased by the three plaintiffs.

According to the CUNA Mutual complaint, between 2004 and 2007,the company said RBS “induced” it to buy 15 certificates in 10separate RMBS offerings by making representations about the creditquality of the pools of mortgage loans collateralizing thoseRMBS.

RBS made these representations through its offering documents,which consisted of registration statements, prospectuses, termsheets, free writing prospectuses and prospectus supplements, CUNAMutual said. The documents supposedly contained various statisticalrepresentations about the loan pools backing the RMBS, includingtheir loan-to-value ratios, combined loan-to-value ratios and owneroccupancy rates.

“For investors like CUNA Mutual, these quantitativerepresentations were material because they provided an indicationof anticipated default rates in the loan pools and anticipatedforeclosure recoveries on the defaulted loans,” the complaintread.

CUNA Mutual said it relied on RBS’s quantitative representationsin deciding to purchase 15 certificates in the10 separate RMBSofferings. After CUNA Mutual’s purchases, all 10 of the securitiesperformed poorly, and the 15 certificates have since lost much oftheir value, according to the complaint.

CUNA Mutual said it is seeking to recover $72 million, theamount it would take for RBS to buy back the failed RMBS.

“This action is about righting a wrong and is being taken in thebest interests of CUNA Mutual Group and its policyholders” said JimBuchheim, CUNA Mutual vice president of corporate communications,in a statement. “The complaint we filed fully explains why we tookthis action. However, because this issue is in litigation, we willnot comment further on the lawsuit.”

Before it filed the lawsuit, CUNA Mutual said it commissioned aforensic investigation of the loan pools collateralizing the 10RMBS to test the accuracy of RBS’s quantitative representations. Itsampled 17,949 loans from each transaction and conducted aretroactive appraisal using valuation models and historical data totest RBS’s representations about LTV and CLTV ratios. CUNA Mutualalso analyzed public records to test RBS’s representations aboutowner occupancy rates.

CUNA Mutual said its investigation revealed that RBS’squantitative representations in the offering documents of the 10RMBS were false at the time they were made. Specifically, RBS“dramatically understated the LTV or CLTV ratios of the loan poolsunderlying the 10 RMBS.”

On average, the actual weighted average LTV or CLTV ratio acrossthe10 RMBS was 11.8% higher than what RBS represented, according tothe complaint.

CUNA Mutual said RBS also falsely represented that loan in the pools had an LTVor CLTV ratio above 100%. On average, 26.9% of the sampled mortgageloans had LTV or CLTV ratios above 100%, meaning the outstandingloans on the mortgaged properties exceeded the value of theproperties at the time of loan origination.

According to the complaint, RBS also “dramatically overstated”the percentage of the mortgages in the underlying loan pools thatwere owner occupied. On average, each of the 10 RMBS overstatedowner occupancy rates by 12.1%, the complaint said.

“These actual statistical characteristics made the mortgagepools underlying the 10 RMBS at issue much more risky than RBS’sstatistical representations indicated,” CUNA Mutual said in itscomplaint.

RBS also allegedly made representations about the mortgageunderwriting standards of the originators that issued the mortgageloans that served as the collateral for the 10 RMBS, according toCUNA Mutual. Specifically, RBS represented that the originatorsadhered to the underwriting standards set out in the offeringdocuments.

“These representations were material to CUNA Mutual because theyprovided another indication of the credit risk associated with theloan pools in the RMBS. CUNA Mutual relied on these representationsabout adherence to underwriting standards when deciding to purchasecertificates in all 10 RMBS at issue,” the company said.

RBS’s representations about the originators’ adherence tounderwriting standards were also false at the time they were made,according to CUNA Mutual.

“In truth, the originators had systematically abandoned theirunderwriting standards. The originators’ abandonment ofunderwriting standards has been revealed through regulatory,judicial and media scrutiny following the collapse of the RMBSmarket in the second half of 2007,” the complaint said.

Because the mortgages in the pools collateralizing the RMBS werelargely underwritten without adherence to underwriting standards,they were significantly riskier than RBS represented, CUNA Mutualsaid. A material percentage of the borrowers whose mortgagescomprised the RMBS purchased by CUNA Mutual “were all but certainto become delinquent or default after origination. As a result, theRMBS were destined from inception to perform poorly.”

CUNA Mutual also charged that RBS used inflated credit ratingsto “induce” the company to buy the 15 certificates.

“Institutional investors like CUNA Mutual predominantly investin relatively low-risk, investment grade RMBS. RBSgave the rating agencies the same false quantitative data aboutloan characteristics and made the same representations aboutadherence to underwriting standards that it made to CUNA Mutual,”according to the complaint.

The rating agencies then projected the performance of the RMBSbased on these “false assumptions” and because those assumptionsunderstated the credit risk of the collateral pools, the ratingagencies assigned inflated credit ratings to the certificates inthe 10 RMBS. RBS then used the inflated ratings to market thecertificates to CUNA Mutual while representing that the inflatedratings were an accurate measure of the certificates’ creditquality, the company said.

CUNA Mutual said it “does not allege–and its complaint shouldnot be read to imply–that RBS intentionally or knowinglymisrepresented quantitative loan characteristics, favorable ratingsand adherence to underwriting standards when it sold the 15certificates at issue to CUNA Mutual. But these misrepresentations,even if negligently or innocently made, entitle CUNA Mutual torescind its purchase of the 15 certificates.”