Risk & Compliance

BNY Mellon, U.S. Bank Hit With Suits Over RMBS Losses

The FDIC sued the banks over their role as trustees of nearly $2.2 billion of securities purchased by failed financial institution Guaranty Bank.
Matthew HellerAugust 20, 2015

The U.S. Federal Deposit Insurance Corp. has sued Bank of New York Mellon and U.S. Bancorp over their roles as trustees for nearly $2.2 billion worth of residential mortgage-backed securities that were purchased by a failed Texas bank.

After Guaranty Bank closed in August 2009, the FDIC, acting as its receiver, sold the securities for a total loss of nearly $500 million. In the suits filed Wednesday, the regulator alleges BNY Mellon and U.S. Bancorp are liable for those losses because they abdicated their “fundamental duties” as trustees.

“While BNY Mellon stood idly for years, the sponsor kept defective mortgage loans in the covered trusts, the servicer reaped excessive fees for servicing the defaulted loans from the covered trusts, and plaintiff was left to suffer enormous losses,” the FDIC said.

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The BNY Mellon suit involves $2.06 billion in residential mortgage-backed securities that were purchased by Guaranty Bank and contained loans originated by Countrywide Home Loans. In the other case, the FDIC is suing over more than $248 million of mortgage debt bought by Guaranty and containing Countrywide loans.

Guaranty collapsed after taking a $1.5 billion writedown on the value of the mortgage-backed securities it held. Its failure was the 10th-largest in U.S. history.

The FDIC claims BNY Mellon is liable for more than $440 million in losses and U.S. Bancorp is liable for more than $55 million in losses.

Since 2013, the regulator has secured more than $1.8 billion in settlements from financial institutions over mortgage-backed securities that were sold to failed banks.

In litigation with investors in RMBS trusts, BNY Mellon has argued that it cannot be sued over duties that weren’t in the pooling and servicing agreements governing the trusts. While investors alleged BNY failed to track down missing mortgage file documents, BNY said the PSAs only require it to receive and make certifications about the documents that Countrywide actually delivered.

“[A] trustee cannot be held to a contract different from the one actually adopted,” the bank said.

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