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CUNA Mutual to appeal ruling on mortgage-fraud bond claim

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MADISON, Wis., and EAST BRUNSWICK, N.J. (3/6/12)--CUNA Mutual Group says it will seek an appeal of a federal judge's ruling Thursday that it must pay an insurance bond claim stemming from mortgage fraud  that caused the collapse of CU National Mortgage.

The fraudulent mortgage loans cost 28 credit unions, Fannie Mae and others nearly $140 million and sparked a number of lawsuits.

The U.S. District Court for the District of New Jersey, a lower trial court, found in favor of Sperry Associates FCU, a $307 million asset credit union based in Garden City Park, N.Y., which had sued CUMIS Insurance Society Inc. to recover losses the credit union says was covered under its fidelity bond insurance. At issue was whether an insured credit union's claim for fraud committed by third parties in a mortgage scheme was covered under the insurance bond.

"The trial court's decision is unfortunate, and represents an overly broad interpretation of who is covered under the bond's Employee Dishonesty coverage," said Phil Tschudy, media relations manager for CUNA Mutual Group. "But in cases involving complex legal issues like this one, it is often up to the appellate courts to render a final decision, and we intend to seek appellate review in this case," he told News Now.

Sperry had entered into a mortgage servicing agreement with CU National Mortgage, a subsidiary of U.S. Mortgage Corp. Under the agreement CU National Mortgage would sell the credit unions' mortgage loans to the secondary market, said the court document.

However, CU National Mortgage instead sold 189 mortgages of Sperry and 27 other credit unions without authorization to Fannie Mae.  CU National Mortgage and U.S. Mortgage Corp filed for a Chapter 11 bankruptcy in 2009, and Michael McGrath, of Pinebrook, N.J., president of the U.S. Mortgage Corp. and a principal of CU National Mortgage, was sentenced to 14 years in prison in last year for using the mortgage sale proceeds to prop up his business (News Now Feb. 25, 2011).

In his opinion Thursday, U.S. Senior District Judge  Dickinson R. Debevoise wrote that  both CU National Mortgage and McGrath operated as employees under the "servicing contractor" definition of the bond. CUMIS argued that the servicing contractor definition had not applied because the fraud was not perpetrated while performing services for the credit union and was therefore outside the bounds of mortgage servicing activity covered under its bond.

"CUMIS' argument is unavailing because it ignores that the dishonesty was within the scope of a performed duty: but for the covered activity of collecting and recording loans, the fraud could not have been originated, perpetrated, nor concealed," Debevoise said in the opinion.

He noted that "this is clear based on an examination of McGrath's affidavit which attests that CUN falsely represented to Sperry that the loans remained in their servicing portfolio and continued to be serviced by CU National as provided for in the service agreement; CUN engaged in this conduct as a servicer which allowed CU National to continue to make the unauthorized loan sales without being discovered by Sperry."

RBS response Insurers suit should target others

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MADISON, Wis. (3/6/12)--RBS Securities Inc. has responded to a lawsuit filed by CUNA Mutual Group insurance companies seeking to require it to buy back $72 million in  mortgage-backed securities that the insurance companies bought before the financial crisis hit.

The suit, filed by CUNA Mutual Insurance Society, CUMIS Insurance Society, and MEMBERS Life Insurance Co., seeks rescission of 15 certificates in 10 separate residential mortgage backed securities  (RMBS)  they bought.

CUNA Mutual's complaint alleges that between 2004 and 2007, RBS had made "representations about the credit quality of the pools of mortgage loans collateralizing those RMBS." The supporting documents for the investments contained "untrue or misleading statements concerning the loans underlying each separate RMBS offering," and the  RMBS performed poorly and the certificates lost much of their value, CUNA Mutual maintained in its complaint.

RBS' motion to dismiss, filed Feb. 15 in the U.S. District Court for the Western District of Wisconsin  in Madison, said the company "did not make any of the alleged misrepresentations" in the suit.  "To the contrary, each of the alleged misrepresentations at issue was made either by originators (with respect to underwriting guidelines), borrowers (with respect to owner-occupancy), ratings agencies (with respect to credit ratings) and appraisers (with respect to loan-to-value ratios).  Indeed, RBS specifically disclaimed the making of these representations."

RBS's rebuttal also said that allegations aren't actionable misrepresentations. "The mere fact that the certificates suffered a decline in value in the intervening six-plus years that CUNA owned them does not plausibly suggest that misrepresentations were made in the offering documents," said RBS.

RBS also said nine of the 15 certificates at issue are time-barred and that CUNA Mutual's demand for a jury trial be "stricken because it has no right to a jury trial on its rescission claim."

"We disagree with the RBS claims and will respond accordingly in our court filings," said Rick Uhlmann, senior manager, media relations, at CUNA Mutual Group. "Again, the action we are taking is in the best interests of CUNA Mutual Group and its policyholders," he told News Now.

Five lenders who sold subprime mortgages have filed  for Chapter 11 bankruptcy, according to an earlier court document. They are Washington Mutual, First Magnus Financial Corp., Delta Funding Corp., New Century Mortgage Corp., and Fremont Investment & Loan.

CMG white paper Payment protection products good value

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MADISON, Wis. (3/6/12)--About 80% of credit unions surveyed believe payment protection products are a good value for their members and increase their comfort level in obtaining a loan, according to a white paper published by CUNA Mutual Group.

"Payment Protection: Member Value, Marketing Combine for Win-Win" examines credit unions' perceptions of payment protection products, their importance to members, cross-selling perceptions and sales culture. Research showed that, in addition to accommodating members' financial needs, payment protection also addresses the loss of non-interest income for credit unions. More than 330 credit unions were included in the research.

Some statistics uncovered by the 2011 report include:

  • About 92% of surveyed credit unions say a cross-sell culture is very important to their success;
  • Only 33% of the credit unions surveyed say they are satisfied with their cross-sell efforts;
  • Roughly 59% of these credit unions' members look to their credit union for help or advice regarding their financial situation, with members seeking information on financial products and services; and
  • About 83% of credit unions say members will repurchase once they've been sold a product.
A PDF of the white paper can be found on CUNA Mutual Group's web site. Use the link. Also, Rich Trace, director, product management, CUNA Mutual Group, provides an overview of the white paper's findings in a short video. Use the link.

Retailers file for summary judgment on interchange rule

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WASHINGTON (3/6/12)--A group of retailers and merchants organizations have filed a motion for summary judgment in a Washington, D.C. federal court, challenging as invalid the Federal Reserve Board's  interchange transaction fee regulation and network non-exclusivity regulation mandated by the Dodd Frank Act.

NACS, National Retail Federation, Food Marketing Institute, Miller Oil Co. Inc., Boscov's Department Store LLC, and the National Restaurant Association--a group of merchants and trade associations that represent them--filed the motion Friday in the U.S. District Court for the District of Columbia, seeking a summary judgment declaring the interchange rule and a network non-exclusivity regulation invalid.

The motion for summary judgment claims the rules exceed the authority granted to the Fed by Congress, and that the final rule is "arbitrary, capricious, an abuse of process and otherwise not in accordance with the law in violation of the Administrative Procedure Act," said the motion filed.

The merchants' motion for summary judgment argues that the statute directs the [Federal Reserve] Board to adopt regulations limiting interchange transaction fees, and the specific amendment required "that debit card interchange fees be reasonable and proportional to the cost incurred by the issuing bank (the 'issuer') with respect to the debit card transaction."

The statute directed the board to take into account certain statutory considerations, the motion said. "Chief among them, the board must distinguish between two categories of costs associated with debit card transactions: (a) the incremental cost incurred by an issuer for its role in the authorization, clearance or settlement of a particular electronic debit transaction, which must be included in the board's interchange fee standard; and (b) other costs incurred by an issuer which are not specific to a particular electronic debit transaction, which must be excluded from consideration."

"After receiving significant pushback from the banking community in the comment process, the board reversed course and adopted a final rule that greatly expanded the costs allowed in the interchange fee standard" and "invented a third category of costs over which it claimed unbridled discretion to consider in its standard," the document alleged. The rule "doubled or even tripled the interchange fees allowable," which resulted in "shifting billions of dollars in additional costs from the issuing banks to merchants that accept debit cards."

The board--"in willful disregard of the plain text and purpose of key statutory provisions," said the complaint--created  "a third category of costs found nowhere in the statute's plain text--costs 'that are specific to a particular electronic debit transaction but that are not incremental costs related to the issuer's role in authorization, clearance and settlement.'"

As for network fees--the fees charged by Visa, MasterCard and other debit card networks for their role in processing those transactions--"the board is required to adopt regulations prohibiting debit card networks and issuing banks from 'restricting the number of payment card networks on which an electronic debit transaction may be processed' to fewer than two unaffiliated networks."

The final rule "improperly implements this network non-exclusivity provision by requiring issuers to maintain two unaffiliated networks on each debit card issued to consumers. By focusing on the debit card, the board loses sight of the statute's requirement of network choice as to each electronic debit transaction.

The motion noted that "because of technological limitations and prevailing practices in the market, the majority of merchants are not enabled to accept both signature and PIN transactions." The final rule would mean "entire categories of debit card transactions--such as internet and telephone transactions, hotel stays and car rentals--are not afforded the competitive network choice required by statute," said the merchants group.

The interpretation "deprives nearly 75% of merchants that accept debit cards but that are not enabled for PIN transactions of any competitive network choice."  Thus, said the merchants, "the network non-exclusivity rule contravenes both the letter and the purpose of the Durbin Amendment and cannot survive judicial review."

Eight CUs sustain minor damage in weekend tornadoes

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MADISON, Wis. (3/6/12)--Eight credit unions in the Midwest and the South sustained some form of damages--mostly minor--during last weekend's tornadoes. While most credit unions appear to have emerged relatively unscathed, they remain on alert to help members impacted by devastating storms in 10 states.

At least 39 people were killed in five of the states hit by 74 tornadoes. The deaths were in Kentucky, Indiana, Ohio, Alabama and Georgia (USA Today March 5).

"The CUMIS Property and Casualty Disaster Team has been in touch with all impacted leagues, as well as those credit unions we identified as being in the path of this past weekend's storms," said Phil Tschudy, media relations manager for CUNA Mutual Group.

"Although we've identified eight credit unions that sustained some form of damage, all but one report those damages to be minor. The one exception is to a branch facility in North Carolina that sustained damages to the exterior," Tschudy told News Now. For confidentiality reasons, he could not name the credit union.

Five tornadoes touched down in Ohio on Friday ( March 3). At least three deaths have been reported. However,  no Ohio credit unions appear to have suffered any structural damage, according to Patrick Harris, the Ohio Credit Union League's director of media relations. "We appear to have been very lucky," Harris told News Now.

About 80% of the town of Moscow, Ohio, was devastated by a tornado, said Karen Riels, vice president of marketing and operations for Classic FCU, Amelia. Moscow is about 10 miles from Amelia.

Most Moscow residents were not allowed to access their homes on Sunday, Riels said. Much of the area was without power through the weekend.

No homes owned by Classic FCU employees suffered major damages, but the credit union was working Monday to help members in the early stages of the recovery process.  The credit union is waiving fees for check reordering and easing password standards for members logging into their accounts. "We're doing anything we can to simplify processes for them," Riels said.

Violent storms also tore through southern Indiana, killing at least 14 people and damaging several small communities, according to

Substantial damage was sustained in Clark County, Ind., where Clark County Indiana Teachers FCU is located, said Wanda Holdaway, manager of the Jeffersonville, Ind., credit union. She heard from one member whose car was crushed during the storm. "I am waiting to hear from more people," Holdaway said. "Considering our field of membership, I know there will be more."

Thirteen tornadoes touched down in Kentucky, killing at least 12 people, according to

The L&N FCU branch in Erlanger, Ky., located in Kenton County, suffered no damage, although "the tornadoes touched down all around us," Laquinta Strickland, branch operating officer, told News Now.

Strickland said she had heard of one member whose home had been destroyed. No branch employees' homes were damaged, she said.

At least two confirmed tornadoes struck the northern part of Alabama Friday, damaging homes and other buildings and businesses ( March 3).

A deadly tornado that struck two counties was 1,000 yards wide--or the length of 10 football fields put together--and resulted in the death of one Alabama man ( March 5).  Alabama credit unions also appear to have escaped unharmed from the weekend tornadoes.

"As of right now, after checking with just about all of the state's credit unions, the tornadoes did not damage any credit unions or cause power outages for credit unions," Mike Bridges, vice president of marketing and communications for the League of Southeastern Credit Unions, told News Now Monday afternoon. "We have heard of some damage to credit union staff's homes, but have not confirmed that yet."

Illinois credit unions reported no damage from Friday's tornadoes, Will Wille, public relations coordinator for the Illinois Credit Union League, told News Now.

Two substantial waves of severe weather hit Tennessee Friday but no deaths were reported. About 75 tornado warnings were issued in the state, with several tornadoes reported resulting in several injuries statewide ( March 3).

The storms and tornadoes that hit the Chattanooga, Tenn., area Friday--injuring at least 33 people and damaging hundreds of homes--constituted the second-largest outbreak in the last 25 years, according to local experts ( March 4). It was unknown whether any credit unions in that state were directly impacted.

Catalyst Corporate surpasses 1000 members

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PLANO, Texas (3/6/12)--The number of credit unions that have capitalized Catalyst Corporate FCU in Plano, Texas, six months after its inception has grown to more than 1,000.

Catalyst Corporate passed that mark last week as several credit unions continued submitting paperwork to authorize capital contributions. The corporate credit union ended the week with 1,012 members that collectively provided more than $114 million in capital funding.

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"The 1,000-credit union mark is mostly significant inasmuch as it indicates that Catalyst's low capitalization levels and breadth of cooperative-priced services appeals to credit unions," said Kathy Garner, the new president/CEO of Catalyst Corporate.

More than 100 of the newest Catalyst members are recent converts from Western Bridge Corporate FCU in San Dimas, Calif., Garner said. "While credit unions from all parts of the country have joined Catalyst Corporate, there has been a surge of Western Bridge members making the transition," she said.

"Catalyst executives recently had the chance to meet hundreds of credit union officials from Western Bridge credit unions during our recent series of 20 town hall meetings," Garner added.

The meetings were a follow-up to the National Credit Union Administration (NCUA) December announcement that Catalyst Corporate was selected to acquire the operations of Western Bridge Corporate. NCUA's decision put into motion a plan that provided a non-disruptive, low-cost transition for Western Bridge member credit unions, Gamer added.

"One of the key points that we share with attendees is the way in which the model allows the corporate to maintain a low-risk balance sheet while building retained earnings sufficient to meet future regulatory requirements," Garner said. "Catalyst Corporate's efficiency will ensure that the corporate will thrive financially, meet all of the capital and retained earnings objectives, and continue to be innovative in the delivery of services." 

Catalyst Corporate already is exceeding many of the financial measures such as the coverage ratio--the key measure of efficiency--in its business plan, Garner said.

"Our coverage ratio expectation was high--an 87% estimate used in our business plan, compared with an industry average of about 55%," she added. Catalyst achieved 94.1% for the September-December 2011 period.

Catalyst's model is designed to be less dependent on member contributed capital over time, as a result of strong growth in retained earnings, Garner explained. Catalyst's membership capital requirement is a one-time occurrence with no future adjustments, she said.

CU System Briefs (03/05/2012)

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  • OLYMPIA, Wash. (3/6/12)--Olympia (Wash.) CU alerted the Washington Department of Financial Institutions Monday that counterfeit checks bearing the credit union's name are surfacing in the area. The checks are apparently being mailed from an H&R Block branch in Olympia and appear to be drawn off an Olympia CU checking account, according to the credit union's Website. An accompanying letter states that the funds are sweepstakes winnings (Northwest Credit Union Association Anthem March 1). "Our front line staff received a call to verify funds on one of these checks," said Tammy Allender, $32 million asset Olympia CU's CEO said. After the employee informed the caller the check was not valid, an e-mail was sent to the entire staff warning about them about the possibility of fraudulent checks. More calls came in, and all staff informed the callers [the checks] were fraudulent." We had one institution that had kept its client's 'winning' letter along with a copy of the check, and they faxed it over so we could take a look. We then saw some of these checks showing up on our exception report, and of course those checks were returned" ...

CUSO announces 10 dividend

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LITTLETON, MASS. (3/6/12)--Octant Business Services, LLC, a credit union service organization offering business-loan underwriting, servicing and portfolio administration, is returning a 10% dividend to its owners--the third year on a row for such a payout.

The company also has expanded its client base to include 19 credit unions and earned the highest net profit in the company's history.

Member business lending provides an opportunity for credit unions to grow their membership, as well as improve their communities by turning small-business owners' dreams into reality," said Bob Cipriani, Octant Business Services president/CEO.

Octant also announced that Tom White, president/CEO of Rockland (Mass.) FCU, was elected to serve as chairman of the board.  Mark Cochran, president/CEO of Jeanne D'Arc CU,  Lowell, Mass., was elected vice chairman.