Bloomberg News

JPMorgan, RBS Sued by Federal Agency Over Mortgage Bonds

June 20, 2011

(Updates with plan for more lawsuits in fifth paragraph.)

June 20 (Bloomberg) -- JPMorgan Chase & Co. and Royal Bank of Scotland Group Plc units were sued by the federal agency that regulates credit unions, seeking to recover money lost on mortgage-backed securities.

The National Credit Union Administration Board, or NCUA, accused the institutions of packaging and selling mortgage bonds with loans that didn’t meet underwriting guidelines. The bonds, sold to federally chartered credit unions, caused more than $800 million in losses, according to the agency.

A material percentage amount of the loans included in the bonds “were all but certain to become delinquent or default shortly after origination,” the regulator said in two complaints filed in federal court in Kansas City, Kansas. It didn’t specify the amount of money sought.

Five so-called wholesale credit unions failed because they purchased mortgage-backed securities that lost about $50 billion, David Small, an NCUA spokesman, said in an interview. After repackaging about $28 billion worth of the bonds and selling $10 billion worth, the final loss to the entire federal credit union system will be between $7 billion and $9 billion, Small said.

The agency plans to sue between five and 10 additional banks related to the mortgage bonds, Small said. Agency officials are in settlement talks with the banks, he said.

Untrue Statements

JPMorgan sold credit unions almost $213 million of mortgage bonds using sale documents that contained untrue statements or lacked important information, according to one complaint. RBS used documents with the same flaws to sell credit unions about $138 million of bonds, the NCUA said in the other complaint.

The NCUA wants the banks to help cover losses caused by the failures of the credit unions, including U.S. Central Federal Credit Union, which was placed into conservatorship in 2009. The agency is liquidating the wholesale credit unions. Wholesale credit unions provide services to retail credit unions, which serve consumers.

The prospectuses for the bond sales contained “untrue statements of material fact or omitted material facts,” in violation of U.S. securities laws, according to the NCUA.

Michael Geller, a spokesman for Edinburgh-based RBS, and Jennifer Zuccarelli, a spokeswoman for New York-based JPMorgan, didn’t immediately return calls for comment today.

The cases are National Credit Union Administration Board v. J.P. Morgan Securities LLC, 11-cv-02341, and National Credit Union Administration Board v. RBS Securities Inc., 11-cv-02340, U.S. District Court, District Of Kansas (Kansas City).

--Editors: Stephen Farr, Glenn Holdcraft


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