Consumers don’t have to prove they were overcharged in order to sue settlement services providers for triple damages under the Real Estate Settlement Procedures Act (RESPA), a federal court of appeals has ruled in a precedent-setting decision involving allegations of "captive reinsurance" of private mortgage insurance (PMI) policies.

The decision exposes Countrywide Financial Corp. owner Bank of America to potential damages of nearly $2.7 billion. Countrywide is accused in a proposed class-action lawsuit of funneling business to private mortgage insurers who had agreed to reinsure policies with an affiliated company, Balboa Reinsurance Co.

Consumers don’t have to prove they were overcharged in order to sue settlement services providers for triple damages under the Real Estate Settlement Procedures Act (RESPA), a federal court of appeals has ruled in a precedent-setting decision involving allegations of "captive reinsurance" of private mortgage insurance (PMI) policies.

The decision exposes Countrywide Financial Corp. owner Bank of America to potential damages of nearly $2.7 billion. Countrywide is accused in a proposed class-action lawsuit of funneling business to private mortgage insurers who had agreed to reinsure policies with an affiliated company, Balboa Reinsurance Co.

Several similar cases alleging captive reinsurance schemes by Washington Mutual, GMAC and Wells Fargo brought by the same Pennsylvania-based law firm representing consumers in the Countrywide lawsuit had been stayed pending the appeals court decision and can now move forward.

In their proposed class-action lawsuit against Countrywide, attorneys with Barroway Topaz Kessler Meltzer & Check LLP allege that the lender required homebuyers who took out mortgages with less than a 20 percent downpayment to obtain private mortgage insurance from one of seven companies approved by Countrywide.

Countrywide selected which private mortgage insurer to use for each loan, based on a rotating referral-fee basis without regard to price, terms or quality of the policy, the lawsuit alleged. The carriers reinsured policies with Balboa, a Countrywide subsidiary, which allegedly collected $892 million in reinsurance premiums from 2000-06 without paying any claims. 

The lawsuit claims that reinsurance premiums paid to Balboa amounted to kickbacks to Countrywide by the primary insurers under RESPA, because they were made in exchange for Countrywide’s referral of business.

The U.S. District Court for the Eastern District of Pennsylvania had previously granted Countrywide’s motion to dismiss the case, noting that in Pennsylvania, private mortgage insurance rates are approved by the state, and homebuyers "paid the only legal rate they could have paid."

Because Congress intended that RESPA protect individuals from "unnecessarily high settlement charges," the court said it would not construe RESPA’s damages provision as authorizing consumers to sue if they could not show they were overcharged. …CONTINUED

Although the lawsuit seeks to represent all similarly situated borrowers, the three named plaintiffs all lived in Pennsylvania.

Attorneys for Barroway Topaz argued that even if consumers were not overcharged, captive reinsurance policies harm consumers by artificially inflating premiums for private mortgage insurance, decreasing or eliminating competition and choice among insurance providers, and making true disclosure of settlement-related costs or potential conflicts of interest difficult.

In an opinion filed Wednesday, the U.S. Court of Appeals for the Third Circuit overturned the lower court decision, saying there’s no indication Congress intended for consumers to have to prove they were overcharged in order to sue for triple damages.

As amended in 1983, RESPA section 8(d)(2) creates liability for "any person" who violates the act’s anti-kickback provisions, "in an amount equal to three times the amount of any charge" paid for the settlement service in question, the opinion noted.

"We agree with plaintiffs and the United States, intervening on plaintiffs’ behalf, that the provision of statutory damages based on the entire payment, not on an overcharge, is a certain indication that Congress did not intend to require an overcharge to recover under section 8 of RESPA," the opinion concluded.

The Third Circuit dismissed the argument that Countrywide couldn’t be sued under RESPA because private mortgage insurance rates were set by the state, saying that would "effectively be excluding (private mortgage insurance) from the reach of RESPA, a result plainly unintended by Congress."

The decision in Alston v. Countrywide Financial Corp. sends the case back to the lower court for further arguments. 

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