The courts continue to decide cases challenging captive reinsurance schemes. In two cases this quarter, two different federal courts in Pennsylvania reached different conclusions regarding RESPA claims involving such schemes.  The issue in both cases was whether the claims were barred by the statute of limitations.  The courts disagree as to whether the statute of limitations began to run at the time of closing, or if each payment constituted a new violation.

A.         Cases

  1. Kellis v. U.S. Bank, N.A., No. 1:16CV395, 2017 WL 1194360 (M.D. N.C. March 30, 2017)

Mortgage servicer’s alleged misrepresentations regarding application of principal and interest from monthly mortgage payments did not state a RESPA claim.

Following foreclosure on his home, the homeowner argued that the mortgage servicer “falsely represented” that portions of his monthly mortgage payments would be applied to principal and interest when the payments were actually pooled and disbursed as returns to investors.  The homeowner alleges that this misrepresentation violates RESPA.  The court concluded that the homeowner failed to state a RESPA claim because the alleged wrongdoing did not relate to kickbacks or unearned fees for real estate settlement services, the servicer’s requirement that the homeowner use a title insurer selected by the seller, the servicer’s failure to give proper notice of a transfer of servicing rights, or to respond to a QWR for information.  The mortgage servicer’s motion to dismiss the RESPA claim was granted.

2.         Blake v. JPMorgan Chase Bank, N.A., No. 13-6433, 2017 WL 1508995 (E.D. Pa. April 26, 2017)

The continuing violations doctrine applies to RESPA claims so that each improper kickback or referral fee constitutes a RESPA violation.

Homeowners brought a class action alleging RESPA violations based on the defendants’ captive reinsurance company.  In the alleged scheme, the lenders created subsidiary reinsurance companies that received payments insurers to whom the lenders referred its customers in need of PMI insurance.  The homeowners allege that the reinsurers did not assume any risk and never actually performed true reinsurance services.  The court previously held that the homeowners’ claims were barred by the statute of limitations. 

In this decision, the court considered the homeowner’s motion to amend their complaint to assert a theory tolling the statute of limitations.  The homeowners argued that the continuing violations doctrine applies to their RESPA claim. Under that theory, the statute of limitations does not run until the last violation has occurred.  The homeowners asserted that the defendants violated RESPA each time they paid an illegal kickback, fee, or referral in connection with the mortgage insurance premium payments.

The court concluded that the continuing violations doctrine applies to RESPA claims.  Because the RESPA statute defines violations that may occur after the closing process or are unrelated to the closing, the court found that RESPA violations are not limited solely to conduct occurring at the closing.  The court determined that each unlawful kickback, fee, or referral violates RESPA.  As such, each unlawful fee, kickback, or referral has its own statute of limitations period that does not start to run until the violation occurs.  The court granted the homeowners’ motion to amend their complaint.

3.         Menichino v. Citibank, N.A., No. 2:12-CV-00058, 2017 WL 2455166 (W.D. Pa. June 6, 2017)

Monthly mortgage insurance payments did not constitute new and independent violations of RESPA which would toll the statute of limitations.

Home mortgage borrowers allege that bank, mortgage servicer, and reinsurer created a captive reinsurance scheme whereby they selected mortgage insurers for their customers, and the insurers then paid kickbacks to the Defendants for non-existent reinsurance services in violation of RESPA.  The court previously held that Borrowers’ claims were barred by the statute of limitations.  Borrowers sought to amend their complaint to allege a new theory as to how the statute of limitations was tolled.  Under the new theory, Borrowers claimed that each monthly mortgage insurance payment constitutes a new, independent violation of RESPA.

The court rejected Borrower’s request to amend the complaint.  According to the court, the statute of limitations on RESPA claims begins to run on the date of the closing.  The violation occurred when the loans were closed, and the monthly payments were a continuing consequence of the violation, but do not constitute separate and independent violations.  Borrower’s motion to amend complaint was denied.

B.         Statutes and Regulations

Colorado

Colorado amended its statute regarding referral fees to state that a real estate licensee may not pay or receive a referral fee except in accordance with RESPA.[1]

C.         Volume of Materials Retrieved

RESPA issues were identified 13 times in 11 cases (see Tables 1, 2).  One statute regarding RESPA was retrieved this quarter (see Table 1).

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