Federal Home Loan Bank of Chicago sued lenders including Bank of America Corp. claiming their failure to disclose relaxed subprime mortgage underwriting standards led it to unknowingly buy risky mortgage-backed securities.
The lawsuit was filed in a Illinois state court in Chicago by the congressionally chartered wholesale bank, which describes itself on its website as one of 12 regional U.S. institutions serving smaller retail home lenders.
Bank of America and the other defendant commercial banks, including Citigroup Inc., Goldman Sachs Group Inc. and Wells Fargo & Co., sold it more than $3.3 billion in residential mortgage-backed securities, according to the complaint.
“The defendants did not tell the bank the truth about the loans that comprised the mortgage pools,” underlying the securities, the Federal Home Loan Bank alleged. While it believed it was acquiring “safe” securities, “in fact the bank purchased a toxic stew of doomed mortgage loans,” according to the complaint.
U.S. Securities and Exchange Commission members on Oct. 13 voted 4-1 to consider a requirement that Wall Street underwriters scrutinize mortgages and other debt that is bundled for the sale of bonds.
The federal Dodd-Frank law enacted in July required the SEC to propose the rule after banks were faulted for selling debt to investors without concern for whether the underlying loans would go bad.
“During the financial crisis, investors in the securitization market suffered significant losses,” SEC Chairman Mary Schapiro said. In response, lawmakers and regulators are seeking to “provide investors with better information about the loans backing” securities.
The SEC, which hasn’t announced specific rules on how the reviews must be conducted, is planning to solicit public comment on the matter.
The Federal Home Loan Bank of Chicago, claiming mortgage originators abandoned good underwriting and appraisal standards and engaged in predatory lending, is seeking a court order voiding its purchase of the securities and directing the defendants to repay it their value plus 10 percent annual interest.
“We have not yet had an opportunity to review the lawsuit filed today by the Federal Home Loan Bank of Chicago and are unable to address the specifics of its allegations,” said Tom Goyda, a spokesman for San Francisco-based Wells Fargo, in an e-mailed statement.
Shirley Norton, a San Francisco-based spokeswoman for Bank of America, the largest U.S. bank by assets, didn’t immediately reply to a voice-mail message seeking comment.
Michael DuVally, a spokesman for New York-based Goldman Sachs, and Danielle Romero-Apsilos, a spokeswoman for New York-based Citigroup, declined to comment.
Chicago’s Federal Home Loan serves retail banks in Illinois and Wisconsin.
The case is Federal Home Loan Bank of Chicago v. Banc of America Funding Corp., 10CH45033, Cook County, Illinois, Circuit Court, Chancery Division (Chicago).