Flagstar Bancorp Inc. will take an $8.7 million charge related to a series of fraudulent warehouse loans.
Due to disagreement with a federal judge’s dismissal of its lawsuit against Chubb Group of Insurance Cos., Flagstar announced it will record a one-time pretax charge this quarter of approximately $8.7 million to appeal the court’s ruling.
The coverage dispute reportedly involves an insurance claim Chubb denied on a fidelity bond it issued to Flagstar.
In March 2004, Flagstar discovered that a series of warehouse loans totaling $22.4 million were fraudulently obtained. Flagstar seized cash and real property and recovered additional sums through civil litigation. The government was also able to seize cash and assets from the perpetrators of the fraud — many of whom have been convicted and are serving prison sentences. Other firms that were defrauded competed for cash, property and other assets, but the parties agreed to a ratable split of such proceeds, according to the announcement.
To cover for its remaining loss, Flagstar reportedly sought reimbursement under the forgery coverage of the fidelity bond and filed suit when the insurer denied its claim. The federal court ruled, however, that the loss did not result from the forgery, but instead because the underlying collateral turned out to be worthless.
“We carefully considered our position in this matter and we strongly disagree with the result in this case,” said Mark T. Hammond, vice chairman and chief executive, in the written statement. “We believe that the court overlooked the inherent value in the promissory notes, which in this case were forged, and therefore our fidelity bond claim should have been paid regardless of the validity of the underlying collateral.”
In addition to the appeal, the Troy, Mich.-based company will continue to seek recovery of the civil judgment and criminal restitution order that it has obtained against the fraud perpetrators. Flagstar said it also pursuing conspiracy and fraud claims in a Colorado state court action against another large warehouse lender that previously discovered this scheme, but allegedly misrepresented the situation when providing a reference to Flagstar so that the other lender would be repaid.
