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The NCUA and U.S. Bank have reached an agreement in principle after a seven-year court battle involving $2 billion in residential mortgage-backed securities trusts that led to the liquidation of three corporate credit unions during the 2008 financial crisis.
The federal agency filed a civil lawsuit against U.S. Bank, alleging it failed to fulfill its duties as the trustee for several trusts that included residential mortgage securities. U.S. Bank has flatly denied these allegations. Although U.S. District Court Judge Louis L. Stanton in New York agreed to dismiss the case with prejudice, either party can restore the legal action by letter if a final agreement is not reached by early November, according to Judge Stanton’s Oct. 2 court order.
The NCUA initially filed the civil complaint in December 2018 that accused U.S. Bank of breach of contract allegations in the management of 59 residential mortgage-backed securities (RMBS) purchased by corporate credit unions valued at $4.8 billion. Over the next three years, however, the NCUA filed four amended complaints. The fourth amended complaint focused on 50 RMBS trusts.
However, by the time the NCUA filed its fifth amended complaint in September 2021, the number of RMBS trusts at issue had been reduced to 20, valued at $2 billion. These trusts were purchased by U.S. Central, WesCorp and Southwest Corporate Credit Unions. Court documents did not indicate why the NCUA dropped claims regarding 30 other trusts.
Each trust consisted of hundreds of individual residential mortgage loans pooled together, securitized and sold to investors. Investors purchased certificates issued by each RMBS trust, entitling them to principal and interest payments generated by borrowers’ monthly mortgage payments.
The NCUA’s lawsuit alleged that U.S. Bank failed to meet its contractual duties by not addressing defective loans within the trusts, which allegedly caused the quality of those loan assets to deteriorate. For example, the federal agency alleged the bank failed to review mortgage files, neglected to act when loans defaulted, and faced conflicts of interest because of its multiple roles in the securitization chain. The federal agency also asserted U.S. Bank knew of these problems through lawsuits filed by other inventors, bankruptcy proceedings and other public disclosures.
What’s more, the NCUA claimed U.S. Bank improperly used the trusts to finance its legal defense.
Although U.S. Bank denied these allegations, it acknowledged using the trusts’ funds to pay for its legal defense because it was permitted under the RMBS agreements.
In March 2023, Judge Stanton issued an order and opinion that included eight rulings that favored U.S. Bank and only three rulings that favored the NCUA.
For U.S Bank, Judge Stanton dismissed claims for many trusts because they were found to be untimely under the six-year New York statute of limitations. He also dismissed the NCUA’s claims because of insufficient evidence that the bank failed to fulfill its duties, and for some trusts, he ruled the federal agency did not have proper authorization or legal standing to sue.
For the NCUA, Judge Stanton let stand the federal agency’s claims in only four trusts that were not time-barred by the statute of limitations, and upheld the NCUA’s claims for 5,301 loans because U.S. Bank allegedly had actual knowledge of breaches and was responsible for reviewing loan defects. After the judge’s 2023 ruling, the case continued with legal proceedings until both sides came to an agreement in principle on Oct. 2.
This lawsuit’s resolution came after a separate August ruling that allowed the NCUA to continue another long-running legal battle against Deutsche Bank National Trust Company over billions in losses tied to other RMBS trusts.
In a 32-page ruling filed on Aug. 15, U.S. District Court Judge Sidney H. Stein dismissed a number of claims against Deutsche Bank National Trust Company (DBNTC), reducing its potential liability. However, Stein ruled that factual disputes remain over whether the bank was aware of breaches and whether it fulfilled its trustee enforcement duties.
Those disputes, which are ongoing, may ultimately be resolved by a jury or through settlement negotiations.
Read More: Opinion and Order-NCUA v. U.S. Bank.
Peter Strozniak can be reached at pstrozniak@cutimes.com.
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