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News Now

CU System
Mass. court ruling props up MBS suits says NCUA
LOS ANGELES, Calif. (2/22/12)--The National Credit Union Administration (NCUA) Friday filed notices to inform the U.S. District Court in Central California of a new Massachusetts court ruling that NCUA says supports its arguments in its mortgage backed securities (MBS) lawsuits against RBS Securities and Goldman Sachs & Co.

The case NCUA cited is Mass. Mutual Life Ins. Co. v. Residential Funding. On Feb. 14, the U.S. District Court in Massachusetts denied motions to dismiss similar MBS lawsuits against RBS Securities and Goldman Sachs  and rejected the same arguments that RBS and Goldman Sachs have presented in the lawsuits NCUA brought against them  involving MBS they sold to Western Corporate FCU (WesCorp) and U.S. Central FCU.

"The Mass Mutual court rejected arguments raised by underwriters Goldman Sachs and RBS that are virtually identical to the ones they have raised in this court," said NCUA's motion filed Friday in the California court.

NCUA is awaiting the written ruling of the U.S. District Court in Los Angeles in its lawsuits.  There, U.S. District Judge George Wu has indicated in two earlier tentative rulings that he would dismiss NCUA's case against the two companies.

NCUA, in its most recent filing before the California court, said that the Massachusetts court held that all nine complaints, including two that cited to internal documents and witness testimony satisfied the Securities Exchange Act's Rule 8(a)s notice pleading standard because each alleged "specific practices of abandoning [underwriting] guidelines and …link[ed] such practices with specific lending banks, including with allegations of poor loan performance.

"NCUA's complaint here plausibly alleges the same types of facts and links the alleged systematic disregard of underwriting standards to specific originators," the filing in California said. 

In addition, the Massachusetts court said that the banks' claim that poor loan performance was "due solely to the economic downturn" presented "a question of fact that cannot be resolved on a motion to dismiss."

It also rejected the banks' reliance on certain disclosures of loan risks in the offering documents, saying that the "warnings and disclosures cannot defeat…the claims here…based on wholesale abandonment of underwriting standards."

That court also ruled:

  • That the mere allegation that the banks knew of the appraisals' inaccuracy…is not enough to constitute an allegation of fraud and does not require pleading. NCUA said this is similar to its claims.
  • That inquiry notice was not created by "newspaper articles, industry publications and government reports that were publicly available before early 2007." The publications "provided only generalized reports on the industry, did not discuss [the banks'] practices specifically, and did not alert Plaintiff to potential fraud in any specific securitization it had purchased."
  • That the banks' claim that inquiry notice arose by virtue of post-sale data showing poor loan performance combined with warnings in the offering documents "did not put Plaintiff on notice that the specific underwriting and appraisal practices represented in the offering materials were false."
At the crux of NCUA's arguments  in its cases against the two banks is that the securities documents materially represented compliance with the stated underwriting standards and that its allegations in the Goldman case are stronger than those upheld in numerous RMBS cases. The agency alleges actionable misrepresentations and omissions regarding loan-to-value ratios and credit enhancement, and said the credit unions could not reasonably have discovered the falsehoods before March 20, 2008.

NCUA maintains that the two tentative rulings by the court in California on the RBS case are "erroneous, in light of the persuasive reasoning of numerous other courts." (News Now Feb. 14).


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