MADISON, Wis. – CUMIS Insurance Society and 26 credit unions seeking recompense for losses related to the $140 million fraud at U.S. Mortgage and its CU National Mortgage unit have agreed to move their dispute over bond coverage from a state to a federal court here.
The CUNA Mutual Group subsidiary has asked the court to declare those credit unions’ losses–as much as $125 million–not covered by its bond. “Cumis, which has been actively investigating Defendants’ claims and/or potential claims, contends that coverage under the Bonds does not extend to the claimed Losses, and therefore brings this action to have it declared that Cumis has no duty to indemnify Defendants for such losses,” reads the suit.
The credit unions were among a group of CU National customers that had their mortgages the company was supposed to be servicing for them sold to Fannie Mae without their knowledge by CU National President Michael McGrath. McGrath has pleaded guilty to the massive fraud and is scheduled to be sentenced in February. The credit unions are currently negotiating with Fannie Mae for return of the mortgages and the funds.
Several of the credit unions are reportedly near a settlement with Fannie Mae for a portion of their claims, which would reduce any bond claim with CUMIS. Chris Conway, president of Educational Systems FCU, in Greenbelt, Md., said last week he is hopeful a settlement with Fannie Mae and with CUMIS will result in a recovery of most of the $8 million of his credit union’s funds at stake. But Conway emphasized that each credit union’s circumstances in the fraud are different.
Some credit unions had CU National servicing mortgages that were sold. Some had CU National originating mortgages that were sold to Fannie Mae. Others, originated mortgages through CU National and authorized the sale of some of them to Fannie Mae. Others, like Education Systems, serviced their own mortgages.
CUMIS, faced with one of its biggest payouts ever, first secretly filed its suit in state court in Wisconsin, unbeknown to the credit unions. Conway said he only found out about the state court action during a face-to-face negotiation with a CUMIS representative, prompting his credit union to file its own suit challenging the credit union insurer’s claim.
The CUMIS suit indicates that the credit unions have filed claims totaling at least $40 million. The biggest claims are from: Picatinny FCU ($13.5 million); Pinnacle FCU ($5 million); Educational Systems FCU ($8.6 million); Novartis FCU ($3.5 million); Energy FCU ($3.3 million);Velocity CU ($1.8 million) and Piedmont Advantage CU ($2.2 million).
The latest suit is one of several filed over the case. Both Picatinny FCU and Sperry Associates Employees FCU, another victim of the fraud, have sued Fannie Mae for return of their funds.
