A U.S. regulator sued Bank of New York Mellon Corp on Wednesday over $2.06 billion in residential mortgage-backed securities purchased by a failed Texas bank, and accused it of breaching its duties as bond trustee to protect investors.
In a complaint filed in Manhattan federal court, the Federal Deposit Insurance Corp, which sued in its capacity as receiver for the former Guaranty Bank, said it suffered more than $440 million in losses when it sold the securities in March 2010.
The FDIC filed a similar lawsuit against US Bancorp, another major bond trustee, over more than $248 million of mortgage debt bought by Guaranty, and resulting in “significant” losses when those securities were sold.
Austin, Texas-based Guaranty Bank closed in August 2009, and the FDIC arranged for its deposits to be assumed by BBVA Compass of Birmingham, Alabama, a unit of Spain’s Banco Bilbao Vizcaya Argentaria SA. At the time, the regulator estimated the closure would cost its deposit insurance fund $3 billion.
The Bank of New York Mellon lawsuit concerned 12 mortgage-backed trusts issued by Bear Stearns Cos’ EMC Mortgage Corp unit and by Countrywide Home Loans Inc in 2005 and 2006.
JPMorgan Chase & Co bought Bear in 2008, and Bank of America Corp bought Countrywide in the same year.
As bond trustee, BNY Mellon “shirked its duty” to ensure the loan documents were not incomplete or defective, the FDIC said.
“While BNY Mellon stood idly for years, the sponsors kept defective mortgage loans in the covered trusts, servicers reaped excessive fees for servicing the defaulted loans from the covered trusts, and plaintiff was left to suffer enormous losses,” the lawsuit said.
A spokesman for Bank of New York Mellon had no immediate comment. US Bancorp spokesman Dana Ripley declined to comment.
Since 2013, the FDIC has secured $1.83 billion in settlements with financial institutions over mortgage-backed securities sold to banks it took into receivership.
In July, Morgan Stanley agreed to pay the FDIC $24 million to resolve a lawsuit filed in a Texas state court, according to a settlement agreement on the regulator’s website.
The cases are Federal Deposit Insurance Corp v. The Bank of New York Mellon, U.S. District Court for the Southern District of New York, No. 15-06560; and Federal Deposit Insurance Corp v U.S. Bank NA in the same court, No. 15-06570.