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CUNA Mutual to appeal ruling on mortgage-fraud bond claim
MADISON, Wis., and EAST BRUNSWICK, N.J. (3/6/12)--CUNA Mutual Group says it will seek an appeal of a federal judge's ruling Thursday that it must pay an insurance bond claim stemming from mortgage fraud  that caused the collapse of CU National Mortgage.

The fraudulent mortgage loans cost 28 credit unions, Fannie Mae and others nearly $140 million and sparked a number of lawsuits.

The U.S. District Court for the District of New Jersey, a lower trial court, found in favor of Sperry Associates FCU, a $307 million asset credit union based in Garden City Park, N.Y., which had sued CUMIS Insurance Society Inc. to recover losses the credit union says was covered under its fidelity bond insurance. At issue was whether an insured credit union's claim for fraud committed by third parties in a mortgage scheme was covered under the insurance bond.

"The trial court's decision is unfortunate, and represents an overly broad interpretation of who is covered under the bond's Employee Dishonesty coverage," said Phil Tschudy, media relations manager for CUNA Mutual Group. "But in cases involving complex legal issues like this one, it is often up to the appellate courts to render a final decision, and we intend to seek appellate review in this case," he told News Now.

Sperry had entered into a mortgage servicing agreement with CU National Mortgage, a subsidiary of U.S. Mortgage Corp. Under the agreement CU National Mortgage would sell the credit unions' mortgage loans to the secondary market, said the court document.

However, CU National Mortgage instead sold 189 mortgages of Sperry and 27 other credit unions without authorization to Fannie Mae.  CU National Mortgage and U.S. Mortgage Corp filed for a Chapter 11 bankruptcy in 2009, and Michael McGrath, of Pinebrook, N.J., president of the U.S. Mortgage Corp. and a principal of CU National Mortgage, was sentenced to 14 years in prison in last year for using the mortgage sale proceeds to prop up his business (News Now Feb. 25, 2011).

In his opinion Thursday, U.S. Senior District Judge  Dickinson R. Debevoise wrote that  both CU National Mortgage and McGrath operated as employees under the "servicing contractor" definition of the bond. CUMIS argued that the servicing contractor definition had not applied because the fraud was not perpetrated while performing services for the credit union and was therefore outside the bounds of mortgage servicing activity covered under its bond.

"CUMIS' argument is unavailing because it ignores that the dishonesty was within the scope of a performed duty: but for the covered activity of collecting and recording loans, the fraud could not have been originated, perpetrated, nor concealed," Debevoise said in the opinion.

He noted that "this is clear based on an examination of McGrath's affidavit which attests that CUN falsely represented to Sperry that the loans remained in their servicing portfolio and continued to be serviced by CU National as provided for in the service agreement; CUN engaged in this conduct as a servicer which allowed CU National to continue to make the unauthorized loan sales without being discovered by Sperry."


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