By Dena Aubin
NEW YORK (Reuters) - A proposed class action by a Detroit pension fund accusing Goldman Sachs of misleading investors about mortgage-backed securities can go forward, a federal judge has ruled.
Filed in 2010 by Detroit's police and fire retirement system, the lawsuit accused Goldman of misrepresenting the standards used to qualify borrowers for mortgage loans that were pooled into securities and bought by the fund.
The lawsuit is one of thousands filed against Goldman and other banks over mortgage securities that collapsed in value in the wake of the 2007-2008 financial crisis.
Goldman spokesman Michael DuVally declined comment.
According to court documents, the pension fund purchased about $1.8 million of the securities from a mortgage loan trust created by Goldman in 2007. Goldman issued over $790 million of securities through the trust, the documents said.
Offering documents for the securities said lenders reviewed whether borrowers would be able to meet their monthly payments, when in reality mortgages were issued without regard to borrowers' ability to pay, the lawsuit said.
The lawsuit also said that lenders inflated borrowers' incomes and that appraisers submitted falsely inflated property appraisals.
In a ruling on Thursday, U.S. District Judge Miriam Cedarbaum said that the offering documents were "affirmatively misleading" and denied Goldman's bid to have the lawsuit dismissed.
Goldman had argued that the underwriting policies were only guidelines and lenders had the discretion to deviate from them. However, Cedarbaum ruled that exceptions to underwriting standards were not the same as a wholesale abandonment of them.
The case is Police and Fire Retirement System of the City of Detroit et al v Goldman Sachs & Co et al, U.S. District Court, Southern District of New York, No 10-cv-4429
(Editing by Stephen Coates)