U.S. credit union regulator sues Wells Fargo over crisis-era trusts

[December 26, 2014]  By Sarah N. Lynch
 
 (Reuters) - The U.S. credit union regulator sued Wells Fargo & Co Tuesday, saying the bank failed to fulfill its duties as a trustee for certain residential mortgage-backed securities trusts that soured and brought down five credit unions.

The lawsuit, filed by the National Credit Union Administration (NCUA) in a federal court in Manhattan, seeks a jury trial, damages and full compensation for legal costs associated with the case.

A Wells Fargo spokeswoman declined to comment on the lawsuit.

The NCUA said it is bringing the case after five credit unions bought about $2.5 billion in residential mortgage-backed securities issued from trusts between 2004 and 2007.

Those underlying loans soured, as borrowers began to default on their mortgage payments and lost their homes to foreclosure. The losses on these investments, the NCUA said, eventually led those five credit unions to fail.
 

Regulators said Wells Fargo, as trustee for those trusts, had obligations under the law to correct problems with the loans and to protect the credit unions' interests.

The NCUA said the bank was supposed to review the mortgage files, identify cases where the files had problems such as the lack of a title chain, and certify the files were complete.

The law also requires trustees to take certain steps to protect trust investors. If, for instance, there is a breach of the representations and warranties for the loans, then the trustee must notify the various parties and make an effort to "cure, substitute or repurchase the defective mortgage loans," the NCUA said.

The regulator added that Wells Fargo "failed even to perform the threshold duties of taking full possession of the original notes and mortgages and properly reviewing the mortgage loan files for irregularities."

(Additional reporting by Peter Rudegeair)

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