A $165 million cash settlement has been reached in a class-action lawsuit that alleged investors were misled about the safety of mortgage-backed securities comprised of loans originated by now-defunct subprime lender NovaStar Mortgage Inc.

The settlement with Deutsche Bank, NovaStar, Royal Bank of Scotland and Wells Fargo is pending approval by the U.S. District Court in the Southern District of New York, according to Cohen Milstein Sellers & Toll, the law firm representing the plaintiff class, which includes multiple worker pension funds.

If approved, the settlement will resolve a lawsuit in which the plaintiffs, led by the New Jersey Carpenters Health Fund, allege NovaStar "systematically disregarded its own underwriting guidelines to increase the number of mortgages it could originate and incentivized its employees to make noncompliant loans to extremely risky borrowers," according to a statement by the law firm.

The plaintiffs purchased the mortgage-backed securities during the housing bubble in 2006. NovaStar filed for Chapter 11 bankruptcy last year.

The defendants did not immediately respond to requests for comment, but have previously denied wrongdoing in court documents.

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