A U.S. federal district judge is giving the go-ahead to a class action lawsuit first filed in 2010 by the Detroit firefighter and police pension fund accusing Goldman Sachs (GS) of fraud in relation to the quality of loans in bundles of mortgage-backed securities. 

The Police and Fire Retirement System of the City of Detroit charges that it purchased $1.8 million of MBS from a Goldman Sachs trust that ultimately pushed through $790 million in MBS from 2007 forward.

The pension fund accused Goldman Sachs of making false statements, not performing due diligence, and securitizing deals with risky mortgages, and making false statements about the quality and safety of loans collateralizing certain MBS transactions.

The pension system charges that mortgages were issued without regard to borrowers' ability to pay, and that lenders inflated borrower incomes. Documents further allege that appraisers submitted falsely inflated property appraisals.

In a case with similar allegations against a major bank out of North Carolina, a federal magistrate ruled this week that the U.S. Department of Justice has not proven its charges that Bank of America (BAC) misled investors about the quality of loans bundled into $850 million in mortgage-backed securities, and that the case should be dismissed.

Goldman had petitioned to have the suit dismissed, but the district judge in the case said the documents the pension system offered were sufficient to continue the case.

Goldman defended its position by saying that underwriting standards were guidelines, and that deviations by lenders did not constitute intent to mislead.