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NCUA Files RMBS Suit Vs. Morgan Stanley

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ALEXANDRIA, Va. (9/3/13)--The National Credit Union Administration announced today it has filed a new residential mortgage-backed securities (RMBS) case--this one against Morgan Stanley and alleging such things as "systemic disregard of underwriting standards."

"Firms like Morgan Stanley sold securities that turned out to be faulty, triggering a crisis in the credit union industry that has been extremely expensive to contain and repair, and credit unions are still paying the tab," said NCUA Chair Debbie Matz announcing the suit. "All the credit unions we supervise and insure are sharing this burden. The people who are accountable, those who precipitated this crisis, should be required to shoulder that burden, as well."
 
This newest case is in the U.S.  District Court for the District of Kansas. The defendants are Morgan Stanley & Co., Inc., Morgan Stanley ABS Capital I Inc., Morgan Stanley Capital I Inc., and Saxon Asset Securities Co.

It alleges violations of federal and state securities laws in the sale of more than $566 million in mortgage-backed securities to the U.S. Central and WesCorp corporate credit unions, according to the NCUA.

The complaint alleges the offering documents of the securities sold to the failed corporate credit unions contained statements of material fact that were not true or omitted material facts. The originators systematically abandoned the stated underwriting guidelines in the offering documents and the securities were significantly riskier than represented, according to the complaint. The result, the complaint says, was that the securities were destined from inception to perform poorly.
 
Although filed Aug. 16, the NCUA announcement of the lawsuit filing comes just three days after the regulator received some good news from the U.S. 10th Circuit Court of Appeals.
 
That court overturned a lower court ruling that claimed the NCUA's RMBS case against RBS Securities was time-barred and should be dismissed.  By overturning that ruling, the appeals court enabled the regulator to proceed with its lawsuits against 12 firms, including RBS Securities, which claim losses stemming from residential mortgage-backed securities sold to corporate credit unions.
 
At the time of that decision, NCUA Chair Debbie Matz said the agency would "continue to pursue our claims against firms that sold faulty mortgage-backed securities to corporate credit unions. As liquidating agent for the corporate credit unions, NCUA has a duty to maximize recoveries from responsible parties in order to limit losses to federally insured credit unions."
 
As noted, the NCUA has filed the RMBS lawsuit as the liquidating agent for the corporate credit unions. Its lawsuits claim that the brokers' offering documents for the RMBS had material misrepresentations about the underlying loans that backed the securities.
 
NCUA has filed lawsuits against Barclays Capital, Credit Suisse, Goldman Sachs, J.P. Morgan Securities, RBS Securities, UBS Securities, Wachovia, Washington Mutual, and Bear Stearns alleging violations of federal and state securities laws in the sale of mortgage-backed securities to the five corporate credit unions.
 
Also, the NCUA has settled similar suits with Bank of America, Citigroup, Deutsche Bank Securities, and HSBC, bringing in more than $335 million in funds that were lost due to the corporate credit union investments. The NCUA has said that funds recovered through these cases will be used to help reduce the amount of future corporate stabilization assessments on credit unions.

NCUA Releases August Orders Banning Seven From FI Work

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ALEXANDRIA, Va. (9/3/13)--The National Credit Union Administration has issued seven orders in August prohibiting individuals from Florida to Maine to Wisconsin from participating in the affairs of any federally insured financial institution.

The NCUA said the prohibited individuals are:
  • Colbert Bryan, an institution-affiliated party of Eastern Financial CU in Miramar, Fla., who consented to the issuance of a prohibition order to avoid the time, cost and expense of administrative litigation;
  • Autumn Rene Guillot, a former employee of CU of the Rockies in Golden, Colo., who pleaded guilty to the charge of theft. Guillot was sentenced to 60 months community corrections and ordered to pay restitution in the amount of $275,795;
  • Tania Jackson, a former employee of VyStar CU in Jacksonville, Fla., who pleaded guilty to the charge of defrauding a financial institution. Jackson was sentenced to 12 months in prison and ordered to pay court costs;
  • Kathleen Maheux, a former employee of Rainbow FCU in Lewiston, Maine. Maheux pleaded guilty to the charge of theft by unauthorized taking or transfer. She received two years deferred disposition and was ordered to complete 100 hours of public service;
  • Sharon Maston, a former employee of Sturdy CU in Attleboro, Mass. She was sentenced to one year in prison and five years of probation after pleading guilty to the charge of larceny and forgery of a check;
  • Johanna Mite, a former employee of UFCW Local 342 FCU in Mineola, N.Y., was found guilty of bank fraud. Mite was sentenced to time served, five years supervised release and ordered to pay restitution in the amount of $382,790; and
  • Laura Powers, a former employee of Parker Community CU in Janesville, Wis., was convicted of theft and unauthorized use of an individual's identity. Powers was sentenced to five years in prison, five years supervised release and ordered to pay restitution in the amount of $692,869.75.
Use the resource link to view NCUA enforcement orders online.  They also are available for inspection at NCUA's Office of General Counsel between 9 a.m. and 4 p.m. Monday through Friday. Copies may be ordered by mail from NCUA, 1775 Duke St., Alexandria, VA 22314-3428.

NCUA also makes available links to the enforcement actions of other federal regulators against other institutions or their affiliated parties. Use the second resource link to view those.

Violation of a prohibition order is a felony offense punishable by imprisonment and a fine of up to $1 million.

CUs Can Comment On NACHA Returned-Entries Proposal

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WASHINGTON (9/9/13)--Credit unions can provide the Electronic Payments Association (NACHA) with comment on a proposal that would amend reason codes for returned entries.
 
The proposed changes would clarify that:
  • Receiving Depository Financial Institutions should use Code R03 if they choose to return an entry because the receiver's name on the entry does not match the name on the account; and
  • Receiving Depository Financial Institutions should use Code R04 if they choose to return an entry due to account number issues.
CUNA is interested in how this proposal would affect credit union operations and compliance on the ACH network.
 
The proposed changes are intended to be technical amendments, and NACHA believes the changes would benefit ACH participants by eliminating ambiguity currently associated with the use of these return reason codes.
 
The changes would also improve processing efficiency for RDFIs and Originating Depository Financial Institutions, according to NACHA.
 
The proposed changes would be effective March 20, 2015.ents for the proposed rule are due to NACHA by Sept. 20. CUNA seeks comment by Sept. 9.
 

CUNA Questions Need For New E-filing Rule

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WASHINGTON (9/3/13)--Rather than moving ahead with a proposal to require electronic filing by all credit unions, the National Credit Union Administration should instead encourage credit unions to move toward electronic filing in a reasonable time, with a new rule, the Credit Union National Association said in an Aug. 30 comment letter to the agency.
 
Comments are due to the agency Sept. 3.
 
Currently, credit unions can file reports manually or electronically.  At its July open board meeting, the NCUA proposed to drop the manual reporting option.
 
"It seems unlikely that the manual filings of 59 small credit unions place any kind of significant burden on NCUA's resources," CUNA wrote, adding that those 59 should be given time to come into conformity appropriate to their individual situations.       
 
As noted by CUNA's Deputy General Counsel Mary Dunn, "If a formal rule on this subject is truly necessary, however, it should be flexible enough to allow credit unions that cannot for good reason file electronic reports to continue filing manual reports for a reasonable period of time, say up to nine months."
 
CUNA also suggested that the agency's Office of Small Credit Union Initiatives, if it is not already doing so, work with the state credit union leagues to identify these small credit unions so that they can receive additional assistance to file reports electronically. 
 
Dunn backed a recommendation of Self-Help CU, endorsed by the North Carolina Credit Union League, that the NCUA change the required filing date for call reports to 30 days after quarter-end.
 
"We think this is a very sensible idea, and such a deadline would provide more flexibility for all insured credit unions," Dunn wrote.

Use the resource link to access this and other CUNA Comment Letters.

CUNA Seeks CU Comment Call On Revised QRM Rule

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WASHINGTON (9/3/13)--The Credit Union National Association is encouraging interested credit unions to comment on a joint revised proposal on credit risk retention  issued this week by federal banking agencies. One aspect of the proposal is key for credit unions--a proposed definition of the term "qualified residential mortgage (QRM)" for purposes of creating an exemption from the risk retention requirements under the Dodd-Frank Act.
 
While few credit unions likely would be covered as securitizers of asset-backed securities, the proposal is important to credit unions because the secondary market will likely conform to qualified mortgage (QM) and QRM standards, CUNA noted in its request for comment.
 
CUNA is also concerned that examiners may insist credit unions confine their mortgage loans to QMs and QRMs.
 
Under the proposed rule, the definition of QRM would be revised to be the same as the Consumer Financial Protection Bureau's definition of a QM. This is a development that CUNA had urged.
 
Contrary to the original proposal, there would be no loan-to-value, down payment, credit history, mortgage servicing, or appraisal requirements for a mortgage loan to qualify as a QRM. However, home equity lines of credit, reverse mortgages, mortgages secured by timeshares and temporary or "bridge" loans of 12 months or less would not qualify for QRM status.
 
The proposed rule also differs from the original proposal as QRMs would now include any closed-end loan secured by a dwelling, not just principal dwellings secured by first liens that are securitized.  Subordinate liens would also be eligible for QRM status, as long as they meet the CFPB's definition of QM and are securitized.
 
Importantly, CUNA noted that as part of the re-proposed rule, the agencies are seeking comment on a much more stringent alternative to the proposed QRM definition, termed "QM-Plus" that does address underwriting criteria, such as a 30% down payment.
 
Comments are due to the agencies on the proposed rule by Oct. 30. CUNA, working with its Consumer Protection Subcommittee,
the Housing Finance Reform Task Force on related policy issues, the CUNA Lending Council, the state credit union leagues and credit unions, will be filing a strong comment letter with the agencies to argue against the alternative QM-Plus definition for QRMs.
 
Use the resource link for the CUNA Comment Call on the proposed plan.

Cheney Report: Growth Remains a Major CU Issue

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WASHINGTON (9/3/13)--Growth continues to be the top priority for credit unions on the business front, according to the Credit Union National Association's The Cheney Report
 
When CUNA quizzes credit unions on what their biggest issue is on the business side, "growth always tops the list," the Report states.  The National Credit Union Administration reported last week that credit unions are showing positive signs in increased lending, net worth and membership.  But some credit unions worries that they are not "catching the wave."
 
To support the momentum credit unions are gaining, CUNA is hosting the CUNA Community Credit Union and Growth Conference on Oct. 8-11 in Connecticut. This conference will give credit unions a chance to hear from experts, participate in impact-oriented breakout sessions and leave with ready-to-implement action plans. The Community Credit Union of the year award will also be announced.
 
CO-OP Financial is sponsoring up to 18 scholarships to attend the conference (see resource link). The application deadline is Sept. 6.
 
The conference will give credit unions the tools and knowledge they need to bring in new members and generate new business opportunities and ultimately help the credit union movement achieve their shared vision of becoming America's best financial partner.
 
In addition to highlighting the importance of credit union growth, The Cheney Report also covered:
  • Briefs Fly in Interchange Case; Fed Appeal Process is Underway;
  • Welcome Board Member Metsger;
  • CUNA-Backed Recommendations Make it Into QRM Revision; and
  • Home Cooking Working Well in Tax Battle.
Each Friday, The Cheney Report provides a valuable window into CUNA's actions on behalf of member credit unions and reinforces the value of CUNA membership. To sign up for The Cheney Report, click the resource link below and use the "subscribe" tab on the right of the page.

Past issues of The Cheney Report are also archived on cuna.org.