MADISON, Wis. – CUNA Mutual Group’s CUMIS Insurance Society is asking a state court to declare that surety bonds held by 26 credit union victims of the $140 million fraud by U.S. Mortgage/CU National Mortgage Corp. do not cover an estimated $125 million of losses suffered by those credit unions.
The little-known move came to light in a new civil suit filed last week by Educational Systems FCU, a Greenbelt, Md., credit union that stands to lose $3 million from the fraud and is asking a federal court in Baltimore to order the credit union insurer to cover the losses as part of the bond.
Chris Conway, president of Educational Systems FCU, said over the weekend that he was compelled to file the new suit to prevent CUMIS from getting a court order protecting against his credit union’s bond claim. "They kind of forced our hand," Conway told The Credit Union Journal on Saturday. "We have a valid claim and it’s pretty straightforward. We couldn’t just let them sit by and deny our claim."
The state suit filed by CUMIS is apparently the second attempt launched by the insurer to get a court to block the claims, which could be the biggest ever against CUNA Mutual. CUMIS originally filed a request for declaratory judgment last June in Wisconsin state court seeking to block the credit unions’ claims, but the credit unions were apparently never told of its existence and the suit was subsequently dismissed.
On Aug. 31, CUMIS filed a second attempt at a declaratory judgment, which Educational Systems FCU only learned of on Oct. 27 during a face-to-face meeting with CUMIS and its attorneys in New York City after the credit union representative specifically asked about the existence of any such actions. As a result, the $320 million credit union was served with the Aug. 31 Wisconsin suit on Nov. 23.
CUNA Mutual said Sunday it believes the specific circumstances of this claim aren't covered by its bond. "We believe other entities have liability for the losses the credit unions have suffered and we are continuing to look for ways to assist the affected credit unions in seeking compensation for those losses," said Rick Uhlmann, spokesman for the company.
"However, in fairness to all of our policyholders, we need to abide by and defend the limits of our coverages to avoid having some credit union subsidize the inactions of others," Uhlmann told The Credit Union Journal.
Educational Systems is one of 26 credit unions whose mortgages were being serviced by CU National and were surreptitiously sold by the company’s president, Michael McGrath, to Fannie Mae. McGrath pleaded guilty to the massive fraud in June and is scheduled to be sentenced in February.
Meantime, the credit unions, several of whose future may lie in the balance, have been negotiating with Fannie Mae for the return of their mortgages. The group rejected an offer last month from Fannie for a payment of what amounted to about 20 cents on the dollar, meaning they could realize losses of as much as $100 million. NCUA, which has begun negotiating with Fannie’s federal regulator on behalf of the credit unions, said recently those losses could push several of the credit unions into a condition of under-capitalization.
In its suit, Educational Systems FCU asserts that its CUMIS bond purports to pay for "loss resulting directly from dishonest acts committed by an ‘employee’ or ‘director’ acting alone or in collusion with others." An employee is defined, among ways, as a "servicing contractor," who collects and records payments on real estate mortgage or home improvement loans or establishes tax or insurance escrow accounts on real estate mortgage or home improvement loans.
The credit union alleges CU National sold 36 of its mortgages to Fannie Mae without its consent. Conway expressed optimism that a settlement with Fannie Mae on Educational Systems FCU’s claims is imminent and after a potential settlement with CUMIS his losses will be negligible. With more than 10% capital, his credit union is not expected to be significantly hurt. "It’s true that some credit unions are in jeopardy from this," said Conway. "But it isn’t a matter of survival for me."
But circumstances are different for each affected credit union and Fannie Mae is offering different settlements on that basis. At least two credit union victims, Picatinny FCU and Sperry Associates FCU, have filed suits against Fannie Mae in an effort to recover their funds.
Since the scheme was uncovered, CU National and its U.S. Mortgage parent have filed for bankruptcy and been liquidated. As part of the liquidation, millions of dollars in servicing rights have been sold to other servicing providers.
