Court Gives NCUA Green Light to Sue Investment Banks Over Faulty Securities

August 16, 2016 at 9:12 am Leave a comment

NCUA notched another important legal victory in its quest to have the investment banks which  sold  residential mortgage backed securities to the corporates prior to the Mortgage Meltdown  pay up for allegedly  not adequately warning of the risks involved in buying these securities. The NCUA announced in April that it had recovered more than $3 billion in settlements.  But remember that the lawyers have to be paid and the litigation could still drag on for many years.

To understand yesterday’s decision it’s necessary to take a not so pleasant trip down memory lane. In 2009 NCUA took over Wescorp, then the second largest corporate credit union, after the RMBS’s  it had purchased tumbled in value.  Remember that these bonds are pools of packaged mortgages and investors are paid off from the stream of mortgage payments.   When homeowners stopped paying their mortgages these securities  became almost worthless, necessitating a lifeline from the Treasury  Department and the creation of the Stabilization Fund that all credit unions had to pay into.

NCUA became the first federal agency to sue the investment banks. Its basic argument is that they failed to properly disclose the risks of buying the securities to the corporates because they knew that many of the packaged mortgages were destined to tumble faster than Donald Trump’s poll numbers.

A central issue in this litigation has been whether or not federal law gives NCUA six years to bring these lawsuits under what’s called the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) or at most  three years under the Securities Act of 1933. If the Securities Act applies  NCUA’s claims are time barred.

Yesterday,  the Court of Appeals for the Ninth Circuit reversed a lower court ruling and ruled that the longer period applied. NCUA can  continue its suit against Wachovia Trust  and Nomura Home Equity.  (NATIONAL CREDIT UNION ADMINISTRATION BOARD, as Liquidating Agent of W. Corp. Fed. Credit Union, Plaintiff-Appellant, v. RBS SECURITIES, INC., FKA RBS Greenwich Capital Markets, Inc., Defendant, & NOMURA HOME EQUITY LOAN, INC., Defendant-Appellee., No. 13-56620, 2016 WL 4269897,  (9th Cir. Aug. 15, 2016) The decision means that two federal circuits have now upheld the right of NCUA to bring these suits which translates into more money for credit unions.  The Tenth Circuit reached a similar conclusion in Nat’l Credit Union Admin. Bd. v. Nomura Home Equity Loan, Inc., 727 F.3d 1246 (10th Cir. 2013).

Of course, everyone wants to know how this is going to impact their bottom line but  the truth is no knows yet.  This litigation could drag on for years.   For instance, the investment  firms could appeal yesterday’s decision to the Supreme Court and the core allegations still haven’t been litigated. But give NCUA credit.  It’s already had more success than many people, including this blogger, thought it would when it decided to call in the lawyers.

Entry filed under: Legal Watch, Mortgage Lending. Tags: , , , , , , , , , , , , , .

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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