In a major relief to Bank of America Corporation BAC and U.S. Bancorp USB, the U.S. District Judge in Manhattan dismissed the National Credit Union Administration (“NCUA”) claims, which accused the banks of failure to perform their duties as trustees for residential mortgage-backed securities (“RMBS”). This resulted in losses of $6.8 billion to the credit unions. The news was first reported by Reuters.
Flashback
NCUA, the U.S. regulator for credit unions, sued BofA and U.S. Bancorp for recovering losses on $6.8 billion worth of RMBS that turned bad.
The case, filed in the U.S. District Court for the Southern District of New York in 2014, pertains to the sale of 98 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 over a two-year period from 2009 and 2010, triggering a crisis in the credit union industry.
Update
Early Friday morning, the U.S. District Judge Katherine Forrest rejected claims by NCUA that BofA and U.S. Bancorp failed in their roles as trustees for 98 RMBS trusts.
Per the Reuters report, Forrest said the NCUA lacked standing to sue over 89 trusts because the right to sue had been previously assigned, leaving the regulator 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.
While NCUA spokesman John Fairbanks said the regulator is reviewing the decision, NCUA has recovered nearly $2.46 billion through lawsuits it began filing in 2011 including the $33 million settlement recently with UBS Group AG UBS.
In May 2015, BofA and U.S. Bancorp won dismissal of three lawsuits related to RMBS. The current dismissal will act as a major morale boost for BofA and U.S. Bancorp.
Currently, BofA holds a Zacks Rank #4 (Sell) while U.S. Bancorp carries a Zacks Rank #3 (Hold). A better-ranked banking stock is SVB Financial Group SIVB, which carries a Zacks Rank #2 (Buy).
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