FDIC Sues 11 Banks Over Colonial Bank Failure

12175_lawsuit FDIC Sues 11 Banks Over Colonial Bank Failure The Federal Deposit Insurance Corp. (FDIC) is suing 11 banks – including Wells Fargo, Bank of America, JPMorgan Chase and Citigroup – over $388 million in securities sold to Montgomery, Ala.-based Colonial Bank, which was shut down in August 2009.

According to combined media reports, the FDIC accuses the banks of misrepresenting the quality of the loans within the residential mortgage-backed securities that Colonial purchased. The FDIC alleges that the banks' misrepresentations included incorrect loan-to-value ratios, while many of the properties also carried undisclosed second mortgages.

‘In many cases, the amount of the undisclosed additional liens was much greater than the owners’ ostensible equity, putting the owner underwater on the day on which this securitization closed,’ says the FDIC in its filing.

The FDIC is seeking at least $189 million in damages, along with court costs and attorney fees. Colonial Bank's failure is the largest since Washington Mutual's demise in 2008, and its closure cost the FDIC's federal deposit-insurance fund an estimated $2.8 billion.


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