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Banks Come Out Winners in RMBS Case

gavel-twoFor the most part, when being investigated over their pre-crisis residential mortgage-backed securities practices, the nation’s largest banks have come out having to pay billions of dollars in settlements and penalties.

That changed in the case of National Credit Union Administration (NCUA [1]) Board v. U.S. Bank NA et al in the U.S. District Court, Southern District of New York recently when Judge Katherine Forrest dismissed the NCUA’s claims that Bank of America and U.S. Bancorp were liable for losses on approximately $6.8 billion in residential mortgage-backed securities (RMBS) which were discovered to have defects after they were sold to credit unions.

The complaint that was dismissed was an amended version of a complaint by NCUA [2] against the two banks which was dismissed by Forrest in May 2015.

The trusts in question were purchased before the crisis by five credit unions, Constitution Corporate, Members United Corporate, Southwest Corporate, U.S. Central and Western Corporate, all of which failed over a two-year period in 2009 and 2010, according to a report from Reuters [3].

The NCUA claimed in the suit that the two banks failed in their duties as trustee for 98 RMBS trusts. Forrest ruled that the credit union regulator lacked standing to sue in 89 of the trusts because the right to sue was previously assigned for those trusts—meaning the NCUA was left with only an interest in payment streams. On the remaining nine trusts, the judge dismissed claims from the NCUA that the banks acted in bad faith or breached their fiduciary duties.

Spokespeople from both Bank of America and U.S. Bancorp declined to comment on the judge’s ruling, and a spokesman from NCUA told DS News that the regulator was reviewing the judge's ruling.

In May 2015, Judge Forrest dismissed claims in three separate decisions [2] in lawsuits against U.S. Bancorp and Bank of America accusing the two banks of failing in their duties as trustees for RMBS trusts. In the first decision, a group of institutional investors, BlackRock Inc, Allianz SE's Pacific Investment Management Co and TIAA-CREF sued U.S. Bancorp, claiming the bank was responsible for 843 toxic mortgage-backed securities totaling about $778 billion in collateral. Forrest ruled that the claims were not pleaded correctly on 33 of the trusts and that the remaining 810 trusts did not fall under her jurisdiction.

In the second decision, Forrest dismissed a claim from the NCUA, ruling that the regulator lacked standing to sue the Bank of America and U.S. Bancorp because the certificates for 74 trusts, which were purchased by the five corporate credit unions that later failed, had been re-securitized. NCUA later amended that complaint but the judge still ruled the NCUA lacked standing to sue. Likewise, in the third decision, Forrest ruled that investors based in Ireland and the Cayman Islands lacked standing to sue the two banks.