WASHINGTON-Educational Systems FCU became the first victim of the massive fraud at CU National Corp. to settle claims with Fannie Mae, setting the stage for others of the more than two dozen credit unions hurt by the $140 million scheme to come to agreement with the housing giant.
"We've been negotiating with them [Fannie Mae] since July and August of last year," said Chris Conway, president of Educational Systems, who has turned his eye toward a settlement with CUMIS Insurance Society, which holds a bond with the $340 million Greenbelt, Md., credit union.
Conway said he is prevented from discussing the terms of the settlement under the agreement, but said Educational Systems has received all payments and the return of the 32 mortgages Fannie Mae had bought from CU National under false pretenses. He also expressed optimism that the combination of the Fannie Mae payment and an insurance payout will help his credit union recover most, if not all of the $5 million exposure it has in the case.
Representative of the other credit unions are expected to meet with Fannie Mae in mediation over the few months to try to hammer out an agreement. But Fannie Mae, which was duped into buying the credit union mortgages by Michael McGrath, the president of CU National and its parent, US Mortgage, will have a harder time settling with other credit unions that have much larger claims. Suffolk FCU in New York, for example, has a claim of more than $32 million. Picatinny FCU in New Jersey, more than $14 million.
In addition, the claims of the various credit unions come under different circumstances. Educational Systems, for example, hired CU National to service its loans. Other credit unions authorized CU National to sell loans to Fannie Mae. The varying circumstances have become the focus of an expanding legal battle between 23 credit unions and CUMIS, a unit of CUNA Mutual Group, which has asked the courts for a declaratory judgment stating that its bond does not cover the CU National Fraud.
A suit filed by CUMIS has been transferred from state court in Wisconsin to federal court, but CUMIS is trying to have it sent back to the state court. In recent court filings it argued that each of the credit unions, all based in the Mid-Atlantic States, have business in Wisconsin, either through their dealings with CUNA or the CU Executives Society, so the case should be heard in state court there.
Several of the credit unions have filed their own suits in varying federal courts to have the courts enforce the bonds. Educational Systems has filed suit in federal court in Maryland. Suffolk FCU has filed suit in New York., as has Sperry Associates FCU and TCT FCU.
McGrath, who founded US Mortgage, last year pleaded guilty to selling $140 million worth of mortgages issued by 28 credit unions to Fannie Mae without the credit unions' authorization and pocketing the money. He is scheduled to be sentenced next month.
But most of the money, as much as $125 million of it, has disappeared. Authorities say McGrath lost it speculating in the stock market crash. So far, McGrath has agreed to forfeit about $15 million worth of assets in order to pay victims of the fraud-all of them credit union customers of CU National - leaving the gap of almost $125 million.
