U.S. Bancorp to Pay $6M to Settle Trustee Role Related Suit - Analyst Blog

U.S. Bancorp (USB) is set to shell out $6 million to settle a complaint filed as a class-action by Oklahoma Police Pension and Retirement System in 2011, per a Reuters report. The company's banking subsidiary, U.S. Bank is alleged to have failed in its role as a trustee for mortgage-backed securities that were sold by Bear Stearns in the period before the financial meltdown of 2008.

It was alleged that U.S. Bank breached contract and violated the 1939 U.S. Trust Indenture Act that specifies the duties of trustees. The bank is accused of not reviewing mortgage-loan files on a regular basis in order to check the possibility of loss of documents or keep tab of any documents that were incomplete. As a trustee, the bank grossly neglected its duty of checking whether any defective loans were eliminated from the pools which supported the mortgage-backed bonds.

Per the lawsuit, the mortgage loans that backed the securities were of poor quality as these loans incurred heavy delinquencies and credit losses, which ultimately resulted in huge losses for the investors. This could have been prevented if U.S. Bank was true to performing its duties.

In its complaint, the fund stated that “U.S. Bank's violations of its duties have resulted in certificate holders unnecessarily suffering millions of dollars of losses because they were dependent on a faithless trustee to protect their interests.”

Notably in 2008, Bear Stearns was acquired by JPMorgan Chase & Co. (JPM).

The latest settlement follows the settlement by U.S. Bancorp and Bank of America Corp. (BAC) of a Securities Class Action lawsuit for $69 million last month. Investors accused both these banks of failing as trustees for securities backed by Washington Mutual Inc. home mortgages from 2005 to 2007. (Read more: BofA and U.S. Bancorp Settle Lawsuit for $69M)

Though the latest settlement amount is too less to impact U.S. Bancorp's financials, we believe that it relieves the company from legacy issues to some extent. We remain encouraged by the efforts of the Wall Street banking giant in gradually resolving its legal overhangs.

U.S. Bancorp currently carries a Zacks Rank #3 (Hold). Cowen Group, Inc. (COWN) is a better-ranked stock in the finance space with a Zacks Rank #1 (Strong Buy).