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M.I. Firms Hit With CFPB Investigations, Mountain of Litigation

RESPA violations alleged in re-insurance arrangements

Aug. l 4, 2012

By Mortgage Daily staff


Several lenders and mortgage insurance companies are named as defendants in class actions alleging violations of the Real Estate Settlement Procedures Act of 1974 because of captive reinsurance arrangements. In addition to the civil litigation, the mortgage insurers have been subpoenaed by the government and, more recently, been hit with civil investigative demands from the Consumer Financial Protection Bureau.

A December 2006 lawsuit against Countrywide Financial Corp. alleged RESPA violations because the Bank of America Corp. subsidiary allegedly forced borrowers into overpriced mortgage insurance policies as it earned re-insurance fees from former subsidiary Balboa Reinsurance Co. While that case was dismissed in 2008 by the trial court, the dismissal was overturned by the Third Circuit Court of Appeals in Pennsylvania in October 2009 -- a seminal moment for plaintiffs' attorneys.

Countrywide settled the case for $34 million, and litigation commenced against others in the industry.

A class action lawsuit filed last year against JPMorgan Chase & Co. and several mortgage insurers alleged millions of dollars in illegal premium splits on mortgage insurance through its affiliate Cross Country. JPMorgan's captive reinsurance scheme allegedly violated RESPA.

Fifth Third Bank and six mortgage insurers were sued in April by Christopher Manners, Jamie Young and Aimee Young. The federal lawsuit claims Fifth Third earned $54 million in re-insurance premiums from 2004 through 2011 in violation of RESPA.

The Department of Housing and Urban Development's Office of Inspector General issued various subpoenas to multiple mortgage insurers in December about captive mortgage re-insurance arrangements. But the Consumer Financial Protection Agency, empowered through the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, took over enforcement of RESPA.

In June, the CFPB began issuing civil investigative demands. The demands can be enforced in federal court.

In its second-quarter 2012 earnings report, MGIC Investment Corp. acknowledged that it was a recipient of a HUD subpoena and a subsequent CFPB civil investigative demand with multiple document requests. The Milwaukee-based firm received CFPB correspondence in January indicating that an investigation had been opened by the regulator about captive mortgage re-insurance premium ceding practices.

"Various regulators, including the CFPB, state insurance commissioners and state attorneys general may bring actions seeking various forms of relief, including civil penalties and injunctions against violations of RESPA," MGIC said in the earnings report. "The insurance law provisions of many states prohibit paying for the referral of insurance business and provide various mechanisms to enforce this prohibition.

"While we believe our captive re-insurance arrangements are in conformity with applicable laws and regulations, it is not possible to predict the eventual scope, duration or outcome of any such reviews or investigations nor is it possible to predict their effect on us or the mortgage insurance industry."

Genworth Financial Inc. disclosed Friday in a Form 10-Q filing with the Securities and Exchange Commission that its U.S. mortgage insurance subsidiary received an information request from the CFPB in January and subsequently received a civil investigative demand dated June 20 requiring Genworth to provide specific documents.

Genworth acknowledged that it received a HUD subpoena in December 2011, but the subpoena was withdrawn after the CFPB stepped in.

The Genworth mortgage insurance subsidiary was named as a defendant, along with several other mortgage insurance participants and lenders, in three putative class action lawsuits that allege RESPA violations as a result of certain reinsurance arrangements, according to the SEC filing.

Genworth has been named as a defendant in six subsequently filed putative class actions with similar allegations, and it plans to "vigorously defend these actions."

American International Group disclosed in an SEC filing Thursday that the CFPB issued a civil investigative demand against subsidiary United Guaranty Corp. in June. Documents are being demanded by the regulator related to potential RESPA violations tied to captive re-insurance practices. The CFPB demand followed ongoing industry-wide examinations conducted by the Minnesota Department of Insurance and HUD on captive reinsurance practices by lenders and mortgage insurance companies.

On July 24, the CFPB issued a letter to United Guaranty "agreeing to toll the deadlines" related to the demand as discussions are held that might resolve the investigation.

"UGC has received a proposed consent order from the Minnesota Commissioner of Commerce which alleges that UGC violated the Real Estate Settlement Procedures Act, the Fair Credit Reporting Act and other state and federal laws in connection with its practices with captive reinsurance companies owned by lenders," AIG stated. "UGC is currently engaged in discussions with the MN Commissioner with respect to the terms of the proposed consent order."

In its earnings report released on Aug. 1, Radian Group Inc. acknowledged that it is a defendant in a number of putative class action lawsuits alleging RESPA violations over re-insurance practices. The Philadelphia-based company said it is the subject of inquiries from the Minnesota Department of Commerce and HUD's inspector general. Radian was hit with a CFPB civil investigative demand in June.

Old Republic International Corp. disclosed in a Form 10-Q filing with the SEC on Friday that it had been named -- along with several lenders and other mortgage insurance companies -- in eight purported class action suits alleging RESPA violations. The lawsuits were filed by the same law firms and "are substantially identical in alleging that the mortgage guaranty insurers had reinsurance arrangements with the defendant banks' captive insurance subsidiaries under which payments were made in violation of the anti-kickback and fee splitting prohibitions of Sections 8(a) and 8(b) of RESPA."


Alston v. Countrywide Financial Corporation.
Case No. 08-4334, case No. 07CV03508, December 2006 (U.S. District Court for the Eastern District of Pennsylvania).

McCarn, et al. v. HSB, et al.
(U.S. District Court for the Eastern District of California),

Manners, et al, v. First Third Bank, et al.
(U.S. District court for the Western District of Pennsylvania).

Riddle, et al. v Bank of America, et al.
(U.S. District Court for the Eastern District of Pennsylvania).

Rulison et al. v. ABN AMRO Mortgage Group, Inc. et al.
(U.S. District Court for the Southern District of New York).

Barlee, et al. v. First Horizon National Corp., et al.
(U.S. District Court for the Eastern District of Pennsylvania).

Cunningham, et al. v. M&T Bank Corp., et al.
(U.S. District Court for the Middle District of Pennsylvania).

Samp, Komarchuk, Whitaker v. J.P. Morgan Chase Bank, N.A., et al.
(U.S. District Court).

White, Hightower v. The PNC Financial Services Group, Inc., et al.
(U.S. District Court).

Menichino v. Citibank, N.A., et al.
(U.S. District Court).

Hill, et al. v. Flagstar Bank, FSB. et al.
(U.S. District Court).



Related:
Class Action Filed Over M.I. Kickbacks
A bank and six mortgage insurance companies have been named as defendants in a lawsuit that alleges illegal kickbacks. Plaintiffs seek class-action certification.

M.I. Claims Disputed in Court
Mortgage lenders and other entities have gone to court to collect on hundreds of millions of dollars in denied mortgage insurance claims. Several cases involve Countrywide Home Loans, while Old Republic Insurance Co. is named as a defendant in two cases that saw recent activity. Two lenders are accused of earning improper premiums on mortgage insurance policies.

M.I. Class Action Continues Against Countrywide
An appeals court has reportedly overturned a decision to dismiss a class action against Countrywide Financial Corp., leaving the formerly independent company -- and possibly some of its competitors -- facing further litigation. At issue are alleged violations of the Real Estate Settlement Procedures Act that are tied to mortgage insurance.


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