Wells Fargo, RBS, Deutsche Bank in $165 million NovaStar settlement

NEW YORK (Reuters) - Wells Fargo & Co, Royal Bank of Scotland Group Plc and Deutsche Bank AG have reached a $165 million class-action settlement over their underwriting for the now-bankrupt subprime lender NovaStar Mortgage Inc.

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It resolves claims that offering materials prepared by the banks misled investors into believing that loans underlying roughly $7.55 billion of NovaStar mortgage-backed securities they bought were properly underwritten, and were safe.

The accord was made public on Wednesday, and requires approval by U.S. District Judge Deborah Batts in Manhattan.

The defendants denied wrongdoing in agreeing to settle.

NovaStar had specialized in lower-quality residential mortgages, including many packaged into what proved to be risky securities issued in 2006 and 2007.

The company filed for Chapter 11 protection last July, and is not contributing to the payout.

Steven Toll, a lawyer for investors led by the New Jersey Carpenters Health Fund, said participants in the settlement are expected to receive about 3.1 cents per dollar of face value.

He said that exceeded recoveries in similar settlements involving Bank of America Corp, IndyMac Bancorp Inc, JPMorgan Chase & Co, Morgan Stanley and others.

“This is a significant recovery,” Toll, a partner at lead counsel Cohen Milstein Sellers & Toll, said in an interview. “Thousands of workers associated with the New Jersey fund and others are going to benefit.”

Holders of $2.2 billion of the NovaStar securities are not expected to join in the settlement.

The plaintiffs’ lawyers plan to seek legal fees of up to $46.2 million, or 28 percent of the settlement amount, plus up to $3.5 million for expenses, according to settlement papers.

Hundreds of lawsuits have been filed nationwide against banks over mortgage securities sold prior to the 2008 financial crisis. The NovaStar settlement is one of the last remaining private class actions of this type to settle.

The case is New Jersey Carpenters Health Fund vs Royal Bank of Scotland Group Plc et al, U.S. District Court, Southern District of New York, No. 08-05310.

Editing by Jonathan Oatis and Jeffrey Benkoe