MEDFORD, N.Y. – Suffolk FCU, one of the biggest victims of the U.S. Mortgage/CU National Mortgage fraud, filed suit against CUMIS in federal court Monday, the latest effort by a credit union to prevent the credit union insurer from voiding coverage in the $140 million mortgage fraud.
The $840 million credit union says it lost $42 million when CU National’s President Michael McGrath fraudulently sold 189 of its real estate loans it was servicing to Fannie Mae without the credit union’s authorization and CUMIS, a unit of CUNA Mutual Group, has denied its bond claim. “They have directly told us they are not going to pay the claim,” Patrick Boyle, a New York attorney representing Suffolk FCU, told Credit Union Journal yesterday.
The latest suit comes as CUMIS has asked a federal court in Wisconsin for a declaratory judgment voiding bond claims by 26 credit unions in the case. Two other credit union victims of the fraud, Educational Systems FCU, in Greenbelt, Md., and TCT FCU, in Ballston Spa, N.Y., have also filed suit challenging the CUMIS denial of the bond claims. At least two other credit union victims, Picatinny FCU and Sperry Associates FCU, are suing Fannie Mae.
In its suit, Suffolk FCU said under its bond CUMIS agreed to indemnify the credit union for “all losses arising from the dishonest acts of employees, officers and directors” and “its servicing contractor, CU National.” “The Bond also covers Suffolk for its losses resulting from the forgery of promissory notes and other mortgage-related documentation,” according to the suit.
“CUMIS, however, contends that the losses are not covered under the Bond and wrongly refused to indemnify Suffolk,” says the suit.
Suffolk is one of almost 30 credit unions that suffered losses from the McGrath fraud. McGrath has pleaded guilty to federal charges in the case and is scheduled to be sentenced next month.
McGrath has agreed to forfeit about $13 million worth of assets in the case, leaving as much as $125 million of potential losses for the affected credit unions.
The credit unions are continuing to negotiate with Fannie Mae over return of the mortgages and of the funds, a source told Credit Union Journal yesterday. Several have petitioned Congress to intervene because Fannie Mae is currently being run under conservatorship by the federal government.
CUMIS reiterated its position in the case, asserting the company does not believe the bond covers the circumstances in the Fannie Mae fraud.
