United States Court of Appeals For the Seventh Circuit ____________________ No. 14-2904 CMFG LIFE INSURANCE CO., CUMIS INSURANCE SOCIETY, INC., and MEMBERS LIFE INSURANCE CO., Plaintiffs-Appellants,

v. RBS SECURITIES, INC., Defendant-Appellee. ____________________

Appeal from the United States District Court for the Western District of Wisconsin. No. 3:12-CV-00037 — William M. Conley, Chief Judge. ____________________

ARGUED APRIL 1, 2015 — DECIDED AUGUST 21, 2015 ____________________

Before WOOD, Chief Judge, FLAUM, Circuit Judge, and KENNELLY, District Judge.1 KENNELLY, District Judge. Between 2004 and 2007, CUNA Mutual, an insurance company, purchased fifteen residential

1 Of the United States District Court for the Northern District of Illi- nois, sitting by designation. 2 No. 14-2904 mortgage-backed securities from RBS Securities, Inc. Then the housing market crashed, and the securities with it. CUNA now wants out of the deals. CUNA alleges that RBS induced it to purchase the securities by materially misrepre- senting that the underlying mortgages complied with un- derwriting guidelines. The district court granted summary judgment on all but one of CUNA’s rescission claims, and CUNA appealed. We reverse in part and affirm in part. I. Background The plaintiffs in this case are CMFG Life Insurance Co., CUMIS Insurance Society, Inc., and Members Life Insurance Co., collectively called CUNA Mutual. CUNA sells insur- ance and other investment products to credit unions. In ad- dition to selling investment products, CUNA maintains its own investment portfolio. Between 2004 and 2007, CUNA purchased a number of residential mortgage-backed securi- ties from RBS Securities, Inc. This case involves fifteen of those securities. During the time period at issue in this case, creation of a mortgage-backed security began with origination of indi- vidual mortgage loans. In deciding whether to make a loan, originators evaluated credit risk using underwriting guide- lines. These guidelines were “designed to gauge two crucial factors of credit risks: (1) borrower ability to pay and (2) suf- ficiency of collateral (the mortgaged property) if the borrow- er defaults.”2 Appellant's Br. at 5. Through a complicated

2 CUNA notes that “[o]ccasionally, noncompliant loans [could] be made appropriate credit risks by legitimate ‘compensating factors’ such as low debt-to-income ratio, high borrower assets, or low [loan-to-value] ratio.” Appellant’s Br. at 5. As used by the parties, “guidelines compli- No. 14-2904 3 process involving several intermediaries, hundreds or thou- sands of mortgages would be purchased from originators and bundled into securities. Securities underwriters—here, RBS—then sold these securities to investors. The mortgage payments (or, in the event of default, foreclosure sale pro- ceeds) provided a stream of income to investors. Underwriting guidelines were important to investors for determining the value of securities: the lower the borrower’s ability to pay (or the lower the property value), the greater the risk of default (and more defaults, of course, means less income for investors). Written representations of guidelines compliance were also important to investors because such representations created a legally-enforceable duty. Because originators did not keep the mortgages on their books, they did not bear any risk of default by the mortgagors. Thus, aside from reputational consequences, litigation was the primary deterrent against lax compliance with underwri