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FDIC Sues Major Banks Over RMBS Sales

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A lawsuit filed by the Federal Deposit Insurance Corp. accuses more than a dozen defendants — including units of several major financial institutions — of deceiving failed Colonial Bank in the sale of nearly $0.4 billion in residential mortgage-backed securities.

Colonial Bank was seized in August 2009 by the Alabama State Banking Department. Impaired capital was cited among the reasons for the Montgomery, Ala.-based bank’s demise. It was the biggest bank failure that year.

Insiders at the bank have admitted that they conspired with executives at Taylor, Bean and Whitaker Mortgage Corp. to deceive bank regulators through a fraudulent accounting scheme that brought down Taylor Bean a month earlier. Eight people, including Taylor Bean founder Lee Farkas, have been sentenced after admitting or being convicted of their roles in the fraudulent scheme.

But Taylor Bean wasn’t the only culprit behind Colonial’s collapse, according to a lawsuit filed Friday in a Manhattan federal court by the FDIC.

Among the defendants are units of Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co.

The FDIC alleges that the defendants “made numerous statements of material fact” in the sale of $388 million in RMBS to Colonial. Violations of the Securities Act of 1933 are alleged.

Colonial was misled about the credit quality of the underlying loans, while many material facts were omitted, according to the complaint. Among the information omitted was loan-to-value ratios, the quality of the appraisals and owner occupancy levels. The FDIC also claims that the defendants failed to alert Colonial about how they abandoned their own underwriting standards.

The FDIC based its findings on a random sampling of loans that backed the certificates. Out of 11 securitizations, between half and 73 percent of the loans involved “material untrue or misleading statements.”

The FDIC had three years from the seizure of Colonial to file the lawsuit — leaving it with three days to spare before exceeding the statute of limitations.

The FDIC hopes to collect at least $189.3 million plus legal fees.

One of the defendants is BofA-subsidiary Merrill Lynch. BofA, itself, filed a $1.75 billion lawsuit in U.S. District Court for the District of Columbia against the FDIC as receiver for Colonial Bank and Platinum Community Bank during October 2010. BofA, which is acting as trustee on behalf of Ocala Funding LLC, says that the FDIC has unjustly denied claims.

On Wednesday, a judge for the U.S. Bankruptcy Court for the Middle District of Florida handling Ocala Funding’s Chapter 11 Bankruptcy lifted the bankruptcy code’s automatic stay provision so that BofA could pursue its lawsuit against the FDIC, Dow Jones reported. The judge reportedly said that the stay was being lifted “in the interests of judicial economy and the expeditious and economical resolution of litigation” to allow BofA to “prosecute the D.C. action to its conclusion.”

The Federal Housing Finance Agency filed lawsuits last year as conservator of Fannie Mae and Freddie Mac against 17 issuers and underwriters of mortgage-backed securities purchased by the two secondary lenders. FHFA alleged that some of the losses that Fannie and Freddie suffered on private-label securities were the result of being misled about the risk characteristics of the securities.

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