(CN) – LaSalle Bank must face a lawsuit that claims it improperly researched the financial condition of mortgage-backed securities sold to Wells Fargo, a Chicago federal judge ruled.
In 2006, LaSalle Bank originated two groups of commercial mortgage-backed securities. Each group was worth more than $400 million. It then sold the loans to an affiliate, which in turn, sold the loans to trusts held by Wells Fargo.
When LaSalle sold the loans, it made certain warranties and representations about the terms of the mortgages and the financial conditions of the borrowers.
In 2011, Wells Fargo sued LaSalle for breach of warranty, seeking to have LaSalle repurchase all of the loans except those that have already been paid in full.
Last week, U.S. District Judge George Marovich partially granted a motion to dismiss.
In its complaint, Wells Fargo said LaSalle breached its warranties because the “mortgage loan documents for these loans do not include sufficient power-of-sale language to allow for a non-judicial foreclosure and practical realization against the mortgaged properties.”
Marovich called this a “conclusory” allegation and dismissed it for failure to state a claim. “Plaintiff does not include any specific allegations about what those documents actually say or what language would need to be included in order to be sufficient,” the court held.
Wells Fargo also alleged that LaSalle’s origination and servicing of the loans failed to meet industry standards. Lasalle allegedly “had a policy of awarding ‘top 10 brokers’ leniency with respect to underwriting,” and “did not have its staff inspect the collateral properties or interview property managers regarding occupancy history and renovations,” according to the judgment.
Marovich found that this allegation provided sufficiently specific details as to how LaSalle failed to comply with standards.
“For example, plaintiff alleges that LaSalle, instead of reviewing and analyzing the operating statements and rent rolls for properties being financed, relied on summaries prepared by brokers,” Marovich wrote.
Wells Fargo has 30 days to file an amended complaint.