Borrowers who claim they were fraudulently lent money by the now failed Huron River Area Credit Union have sued the NCUA in an attempt to stop the agency from collecting on the loans.Michigan conserved the credit union in February 2007. NCUA took over as conservator in March, declared the credit union insolvent as of June 30 and liquidated it in November 2007. The collapse left the NCUSIF with a direct loss of almost $39 million, a number that could still climb depending on how the credit union's assets are finally disposed.The 28 borrowers from nine states argued that the loans were fraudulent many times over. Because they lived outside Huron River's field of membership, the borrowers said they were never eligible to have become members of Huron River. Further, they did not know they were being made members of Huron River and never claimed they were buying homes as anything other than investment properties.Construction Loan Co. and Huron River had claimed to both state and federal regulators, the borrowers alleged, that they were members of the credit union and purchasing property to live in. These misrepresentations led to them receiving loans for which they would have otherwise been ineligible. Because these loans were the products of fraud, they argued, the NCUA should not be allowed to collect on the loans as liquidator of the failed CU."It would be unjust and against equity to allow CLC or the NCUA acting as liquidating agent for Huron to enforce the mortgages and promissory notes against the plaintiffs, to obtain ownership of the real property securing those mortgages and to exact money from the plaintiffs based upon the mortgages and promissory notes," the borrowers argued in their complaint. "To allow the NCUA as liquidating agent for Huron to enforce the illegally funded and illegally assigned mortgages and notes against the plaintiffs would be enforcing an illegal contract, which the law does not allow, and would be against public policy."The NCUA declined to comment, citing pending litigation."My clients have sued the agency to prevent it from foreclosing on loans they should have never been made in the first place," asserted plaintiff attorney G. Wrede Kirkpatrick, a lawyer with the Tampa, Fla., firm of Conwell, Kirkpatrick P.A. "They were never members of the credit union, and NCUA's inspector general has admitted as much in the material loss review of the credit union's failure."Kirkpatrick also stressed that his clients were not seeking to keep the loans or the homes or otherwise profit from what has happened. "None of my clients want these homes," Kirkpatrick said. "They just don't want to be faced with paying for having been defrauded."According to the November 2008 loss review, offering the fraudulent loans to people who would not have otherwise been eligible for them appeared to be a key element of the scheme that eventually led to Huron River's insolvency.The inspector general reported that CLC made loans to borrowers that included, in the fine print, that when the borrowers applied for the loan they joined something called Learn and Earn Credit LLC.Learn and Earn Credit was a Huron River CUSO, and the credit union had suggested that membership in Learn and Earn would make the borrowers members of Huron River. But Huron River had never applied to the Michigan's Office of Financial and Insurance Regulation to add the CUSO to its field of membership, a factor that the inspector general believed "contributed significantly to the rapid and uncontrolled loan growth" at the credit union."The plaintiffs do not know who or what Learn and Earn Credit is and never attempted to join such an organization," the borrowers said in their complaint.Kirkpatrick believes the NCUA became aware that the loans were not made to Huron River members fairly quickly after becoming the credit union's conservator in March 2007. Kirkpatrick alleged that the NCUA approached the Michigan regulator soon after it had taken over Huron River and applied to have Learn and Earn LLC added to the credit union's field of membership. No one from the Michigan regulator's office could confirm whether or not this is true, but the office did say that making such an application would have been within the NCUA's authority as conservator.No legal experts contacted would comment for the record since they had not seen the case, but they uniformly doubted that the plaintiffs would prevail in court. Whether the borrowers were members of the credit union or not would not, in and of itself, be enough to void the contracts, they said."Of course you feel bad for them. It sounds like they fell in with some pretty unscrupulous people, but as long as the contracts are binding, they still owe the money," one said.Another pointed out that the NCUA was trying to recoup money for the insurance fund and that all credit unions that pay premiums had a stake in whether or not the agency got as much money as it could. "It's not the government going after these people for this money, the NCUA is acting on behalf of all insured credit unions." –[email protected]