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LI credit unions seek to recover more than $50M

Suffolk Federal Credit Union in Medford has put

Suffolk Federal Credit Union in Medford has put its loss at $42 million. (Jan. 15, 2013) Credit: James Carbone

Two Long Island credit unions are awaiting key court rulings as they try to recover more than $50 million lost to a scheme by a New Jersey mortgage servicing company.

The 60,000-member Suffolk Federal Credit Union, headquartered in Medford, and the 16,600-member Sperry Associates Federal Credit Union, of Garden City Park, hired CU National Mortgage in 2003 and 2006, respectively, to service their mortgages. CU National, now defunct according to court papers, defrauded the two credit unions and more than 20 others nationwide of $140 million by selling mortgages the credit unions owned and pocketing the proceeds.

The former president of CU, Michael McGrath, of Montclair, N.J., is serving a 14-year sentence at the Coleman Federal Correction Institution in Florida for mail and wire fraud and money laundering in the scheme.

Suffolk and Sperry have sued the Cumis Insurance Society of Madison, Wis., which sold them surety bonds to protect against such losses; Suffolk sued in federal district court in Central Islip, Sperry in a New Jersey federal court. Cumis said in the courts the circumstances involved in the CU fraud were not covered.

Suffolk said it was "well capitalized" in its most recent filing with its regulator, the National Credit Union Administration, while Sperry said it has been undercapitalized since the fourth quarter of 2009, around the time the fraud by CU became known. It isn't known whether Sperry's drop in capitalization was connected to its CU National loss; the company's chief executive declined to comment.

Credit union consultant Alan Theriault of Portland, Maine, says a credit union's capitalization is calculated as a ratio of net worth -- that is, what's left after liabilities are subtracted from assets -- to total assets. He said undercapitalization caused by a one-time event such as a fraud would not indicate an unhealthy credit union. "What really matters is, on an operational basis, are they earning money?" he said.

Suffolk Federal, which has $891 million in assets, said in court papers that it suffered a $42-million loss between 2004 and 2009 when CU sold 189 mortgages to the Federal National Mortgage Association, known as Fannie Mae, without Suffolk's authorization.

Sperry Associates Federal, with $288 million in assets, said in court papers that its loss was almost $9.5 million from the sale of 27 mortgages between 2004 and 2009.

Both credit unions are pursuing recoveries, and it's unclear what the ultimate losses will be. Suffolk referred questions to outside attorneys handling the matter, one of whom, Jessie F. Beeber of Manhattan, said in an email, "I can confirm that Suffolk is pursuing all avenues of recovery and that it has successfully recovered a significant portion of its losses as a result of those efforts." Suffolk obtained a settlement from Fannie Mae, whose amount he didn't disclose, and has sued the bankruptcy estate of CU National.

"Any unreimbursed loss resulting from the CU National fraud will not have any material effect on Suffolk's financial health or its members," Beeber wrote.

Sperry had only a $5-million bond and has received about a half-million dollars from Fannie, said Sperry's lead outside attorney, Kenneth J. Pagliughi of Scott A. Rosenberg Pc, in Garden City Park.

A spokesman for Fannie declined to comment.

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