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FDIC Fighting Subprime Repurchases

FDIC Fighting Subprime RepurchasesBeal Bank v. FDIC

August 11, 2008

Weiner Brodsky Sidman Kider PC

A pending federal lawsuit seeks to force the Federal Deposit Insurance Corporation to repurchase more than 1,000 subprime mortgages that have defaulted since they were acquired by a Texas-based bank more than five years ago. The loans were originated by a failed Illinois bank.

Beal Bank, S.S.B., has reached the summary judgment stage in its six-year lawsuit against the FDIC.

The suit arose from a 5,000-plus loan portfolio Beal bought from the FDIC in 2001 and 2002, after the FDIC took over the failed Superior Federal Bank. While Superior was in FDIC conservatorship, the FDIC continued to operate Superior’s subprime department — making hundreds of subprime loans at terms the FDIC itself usually deems “predatory.”

When the FDIC sold the loans to Beal, it did so with extensive warranties. Yet, when over a thousand of the loans Beal bought began to go bad, the FDIC refused to repurchase the loans.

Beal sued in 2002, and now, both parties have squared off in D.C. federal district court on summary judgment.

As FDIC counsel stated, “At bottom … this is a breach of contract case. It is a slight oversimplification, but it is a breach of contract case and I think we are for better or worse stuck with the contract.”

The fight in summary judgment has thus become focused on what remedies, if any, are available to Beal under the contract. There is little dispute that many of the loans Beal bought were bad: a consultant hired in 2004 by the FDIC discovered that nearly 19 percent of the loans Beal bought from the FDIC had breached one or more of the FDIC’s warranties.

An internal FDIC memorandum concluded that “the FDIC’s prospects in this litigation are poor” and saw FDIC liability topping out around $70 million. The FDIC’s biggest arguments against Beal are that Beal’s claims are really tort claims, that New York law governs the contract and that repurchase (and not indemnification) is Beal’s only remedy.

Beal counters that “the FDIC’s legal position is plainly wrong and the FDIC knows this. These arguments should not even be made to this court.” Beal admits it alleged fraud and negligence in characterizing the FDIC’s behavior, but states that “these allegations are relevant to Beal’s contract claims because the contracts themselves warranted that there had been no fraud, dishonesty, misrepresentation, or negligence on the part of the originator.”

On the question of controlling law, Beal points to the contracts in issue and finds their choice of law provision. “It is hard to imagine,” Beal argues, “more clear contractual language than ‘federal law shall control this agreement.'”

To argue its position on remedies, Beal again points to the contract, which carries no language describing any remedies as exclusive, and contains a section where the FDIC agreed to indemnify Beal for breaches of the warranties.

A ruling from Judge Richard J. Leon is pending.

Beal Bank, S.S.B. v. Federal Deposit Insurance Corporation
No. 1:02-CV-02146 (U.S. District Court for the District of Columbia)

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