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A federal appellate court has considered whether a lender violated RESPA by requiring PMI carriers to use its reinsurance subsidiary.
Mary Alston (“Borrower”) obtained a mortgage from Countrywide Home Loans (“Lender”). Because the Borrower made a downpayment which was less than 20% of the purchase price, the Lender required her to buy private mortgage insurance (“PMI”). The Lender referred the Borrower to a group of PMI insurers who were required to reinsure their PMI with a subsidiary of the Lender, Balboa Reinsurance Co. (“Reinsurer”). The Reinsurer provided excess insurance coverage to the PMI insurers if their losses exceeded a certain threshold.
The Borrower brought a class-action lawsuit against the Lender, claiming that its captive reinsurance arrangement violated the Real Estate Settlement Procedures Act (“RESPA”) because the payments to the Reinsurer amounted to a disguised kickback to the Lender. RESPA is designed to protect consumers from unnecessarily high settlement costs in a real estate transaction. Section 8(a) prohibits any person from giving or receiving a thing of value for the referral of settlement services in connection with federally related mortgage loans. Section 8(b) provides that no person shall accept “any portion, split or percentage of any charge made or received for the rendering of a real estate settlement service” other than for services actually performed. Penalties for RESPA violations include damages three times the unlawful charge.
The trial court dismissed the lawsuit, ruling that the PMI rates paid by Pennsylvania citizens had been approved by the state and so were per se reasonable. The trial court also determined that because the PMI rates did not constitute an “unreasonably high settlement charge”, the borrowers had no standing to bring a RESPA lawsuit. The Borrower appealed the court’s ruling.
The United States Court of Appeal for the Third Circuit reversed the trial court. The question before the court was whether a lawsuit for alleged RESPA violations could be brought even if the alleged violation does not result in an overcharge to a consumer.
The court looked at the statutory language, and found nothing in the statute that required an overcharge for a violation of RESPA. Indeed, the court found that RESPA’s penalty provision simply stated that the damages for violations are “three times the amount of any charge paid for such settlement service.” Because the statutory language did not require an overcharge, the court reversed the trial court’s ruling that an overcharge was required in order to bring a RESPA action.
Instead, the court ruled that a consumer can maintain a RESPA lawsuit for any charge that allegedly involves a kickback or fee split that violates RESPA. Thus, the case was sent back to the lower court for further proceedings to determine if the Lender violated RESPA through its “captive reinsurance” program.
Alston v. Countrywide Fin. Corp., 585 F.3d 753 (3d Cir. 2009).