California Federal District Court Dismisses Four Mortgage Insurers from Captive Reinsurance Kickback Suit

RESPA Mortgage Insurance

On May 25, the U.S. District Court for the Eastern District of California dismissed a group of mortgage insurers from a proposed class action over allegations that their reinsurance arrangement with a lender’s affiliate violated RESPA’s anti-kickback prohibitions. McCarn v. HSBC USA, Inc, No. 12-00375, 2012 U.S. Dist. LEXIS 74085 (E.D. Ca. May 29, 2012). In this case, the borrower was required to procure private mortgage insurance (PMI) in order to obtain a mortgage loan. The mortgage insurance he purchased was arranged by his lender. Unbeknownst to the borrower, the PMI provider he engaged had a reinsurance arrangement with the lender whereby the lender required the PMI provider, as a condition of doing business with the lender, to reinsure the PMI provider’s insurance risk with the lender’s subsidiary. The borrower alleged that this arrangement violated RESPA’s anti-kickback provision, which specifies that captive reinsurance arrangements are permissible only if the payments to the affiliated reinsurer (i) are for reinsurance services actually furnished or for servicers performed and (ii) are bona fide compensation that does not exceed the value of such services. Certain of the PMI providers—not the borrower’s actual PMI provider—moved to dismiss the action on standing grounds. They claimed that they did not provide PMI for the borrower’s loan and therefore the borrower’s injuries were not fairly traceable to their alleged actions. The court agreed, and held that the borrower failed to adequately plead a conspiracy and thus did not establish that the injuries were causally connected to these PMI providers’ actions. The court noted that from the PMI providers’ standpoint, the fewer participants in the alleged “scheme” the better because the remaining providers would each get more of the lender’s business. The court found that the borrower had not pled facts supporting a conspiracy, aside from “conclusory allegations of ‘collective action’ to suggest that the various PMI providers would have any financial motivation to act in concert” and dismissed the action without prejudice.