U.S. Bank, NCUA reach deal in Great Financial Crisis case

A yearslong legal battle between credit union regulators and U.S. Bank over mortgage securities dating back to the financial crisis is nearing a settlement, according to new court filings.  

Both NCUA and U.S. Bank said they were unable to comment on the settlement.

A letter dated Oct. 2 from both sides to Judge Louis Stanton of the Federal District Court of the Southern District of New York, said they have "reached an agreement in principle" and want a 30-day stay from further proceedings. This is pending a final agreement and stipulation of dismissal.

Judge Stanton dismissed the case with prejudice but without costs, his memo, also dated Oct. 2, stated. Either party can within 30 days apply by letter to have the case restored to the court calendar.

Normally, a dismissal with prejudice is a final disposition of the matter and neither side can appeal or refile.

Following the Financial Crisis, multiple legal actions were started arguing about what was the role of the trustee.

How did the legal case start?

The NCUA Board initiated the lawsuit against U.S. Bank and Bank of America in December 2018, regarding its role as liquidating agent of U.S. Central Federal Credit Union, Western Corporate Federal Credit Union, Members United Corporate Federal Credit Union, and Southwest Corporate Federal Credit Union.

But that suit had its roots in a 2014 action, which also involved a sixth credit union, Constitution Corporate Federal Credit Union. All the credit unions named had failed as a result of bad RMBS they purchased. That case was one of three dismissed by Judge Katherine Forrest, also of the Southern District, in May 2015. In her ruling, Judge Forrest allowed for amended complaints to be refiled.

Judge Forrest's original ruling was upheld by the Second Circuit Court of Appeals in August 2018.

In August 2019, Bank of America was removed from the case via a settlement, with each side to bear its own costs and attorneys' fees.

What were NCUA's allegations against U.S. Bank?

The fifth amended complaint in this case was filed in September 2021, with only U.S. Central, Western Corporate and Southwest Corporate remaining as plaintiffs.

The proceedings were whittled down to 20 RMBS trusts. The last complaint alleged U.S. Bank had noticed that many of the underlying mortgage files had material defects, representation and warranty breaches, and defaults.

But the bank "allegedly failed to provide notice and enforce warrant or repurchase duties for such loans and otherwise to act as a prudent person in the management of its own property following events of default."

If the trustee had fulfilled its obligations, a significant percentage of the mortgages would have been repurchased from the pools and financial losses would have been averted, the filing said.

The filing also referenced a 2011 U.S. Bank consent order with the Office of the Comptroller of the Currency over servicing practices and a 2015 follow-up action adding further restrictions involving six banks in total, including U.S. Bank.

Back in 2011, U.S. Bank's role as trustee (along with Wells Fargo) in a Massachusetts foreclosure case came under scrutiny by a judge and the media.

Trustees had argued they had no authority over the servicer and a decision to foreclose, an argument to which the plaintiff's attorney in the matter strongly disagreed.