Major American banks continue to be embroiled in legal hassles related to the sale of risky residential mortgage backed securities (“RMBS”). The U.S. regulator for credit unions – National Credit Union Administration (NCUA) – has sued Bank of America Corporation (BAC) and U.S. Bancorp (USB) for recovering losses on $5.8 billion worth of RMBS that turned bad.
The case, filed in the U.S. District Court for the Southern District of New York, pertains to the sale of 99 RMBS trusts to five corporate credit unions between 2004 and 2007. These corporate credit unions are U.S. Central Federal Credit Union, Western Corporate Federal Credit Union, Members United Corporate Federal Credit Union, Southwest Corporate Federal Credit Union and Constitution Federal Corporate Federal Credit Union.
BofA and U.S. Bancorp have been accused by the NCUA of issuing misleading statements and omitting important details in the offering documents of these RMBS. This created obscurity regarding the risks associated with the RMBS.
Consequently, the credit unions perceived the RMBS to be less risky, while on the contrary, these were considerably dicey in nature. Also, the NCUA accused BofA and U.S. Bancorp of ignoring the underwriting guidelines specified in the offering documents.
As a result, when these RMBS lost their value owing to defaults in the underlying assets, the value of the investments of the credit unions in these securities also suffered a fall. Subsequently, all five credit unions collapsed, triggering a crisis in the credit union industry.
BofA and U.S. Bancorp are not the only major global banks that have been sued by the NCUA. In 2013, the regulator had sued nine banks including Morgan Stanley (MS) and Barclays PLC (BCS).
We believe that such cases are inevitably going to result in mounting litigation risks for BofA and U.S. Bancorp, which are already facing substantial legal headwinds. On the other hand, recoveries by the NCUA will lower the losses that stemmed from the failure of the credit unions.
Both BofA and U.S. Bancorp currently carry a Zacks Rank #3 (Hold).
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