The Eastern District of California recently granted partial summary judgment to a class of plaintiffs suing a reinsurer and related entities with respect to a reinsurance arrangement regarding private mortgage insurance that allegedly involved illicit kickbacks. The reinsurer and its related entities may still prevail, however, because the court concluded it could not rule on whether or not the reinsurer and its related entities were entitled to a safe harbor that negates liability.

Home buyers who cannot put down 20% of the purchase price on their house are generally required to purchase private mortgage insurance (PMI) from a mortgage insurer (MI). Mortgage lenders usually direct home purchasers (borrowers) to one of the lender’s preferred MIs.

MIs began transferring some of the risk they took on through PMI by obtaining reinsurance. Mortgage lenders, in turn, created affiliate reinsurers that provided reinsurance to MIs. Through captive reinsurance agreements (CRAs), the MIs allegedly purchased reinsurance from the reinsurers affiliated with the lenders in exchange for PMI referrals from those lenders.

For example, PHH Mortgage Corporation (“PHH Mortgage”), a lender, owns Atrium Insurance Corporation (“Atrium”), a reinsurer that has agreements with MIs to which PHH Mortgage refers a great deal of its borrowers in order for the borrowers to obtain PMI. The MIs then cede a portion of the premiums obtained from PMI to Atrium through captive reinsurance agreements.

The potential problem with that arrangement is that the Real Estate Settlement Procedures Act (RESPA) prohibits giving or accepting “any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise [in relation to the referral of] a real estate settlement service involving a federal related mortgage loan.” RESPA also contains a safe harbor that provides that it does not prohibit “the payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed.”

A class of plaintiffs sued PHH Mortgage, Atrium, and related entities claiming that the arrangement PHH Mortgage had with Atrium and certain MIs violated RESPA by effectuating kickbacks on mortgage loans. The parties eventually cross-moved for summary judgment.

After addressing Daubert motions, the court granted in part the plaintiffs’ motion for summary judgment and denied the defendants’ motion for summary judgment, finding that the plaintiffs had established a prima facie case of a RESPA violation based on the reinsurance arrangement. They concluded that a genuine issue of fact existed as to whether the defendants were protected by RESPA’s safe harbor. Specifically, the court concluded that plaintiffs had satisfied the three elements of a prima facie case: (1) because the “MIs ceded a percentage of their PMI premiums to Atrium pursuant to the CRAs, and those ceded premiums constituted a payment or thing of value,” the requirement that a payment or exchange of a thing of value was satisfied; (2) “payments were made pursuant to an agreement to refer real estate settlement services” involving federally-related mortgage loans because substantial evidence established that “PHH had a practice of referring PMI business to MIs that had agreed to CRAs with Atrium, and that the captive MIs ceded premiums to Atrium pursuant to the CRAs”; (3) a referral occurred because it was “undisputed that PHH directed the vast majority of its borrowers who needed PMI to one of the four captive MIs” and “at no point during the class period did PHH direct less than 80% of its retail PMI business to the captive MIs” (i.e., the ones that obtained reinsurance from Atrium).

The court then turned to RESPA’s safe harbor, which required it to determine whether the MI’s “payment to the lender was a bona fide payment for the reinsurance rather than a disguised payment for the lender’s referral of a customer to the insurer?” The answer to that question turned on whether the payments to Atrium were “more than the reasonable market value of the reinsurance” obtained. The court found that, although there was “substantial evidence” supporting the plaintiffs’ theory that “no real risk was transferred, and thus, Atrium did not provide actual reinsurance services” (there was evidence that Atrium procured substantial profits and that its dividends far surpassed its reinsurance claims, though the court noted that was not necessarily determinative), there also was evidence that Atrium suffered losses during several book years and thus that the reinsurance agreements had actually transferred real risk to Atrium. Thus, the court concluded that there was “a sufficiently genuine dispute . . . that the court [could not] resolve on summary judgment [as to] whether Atrium provided actual reinsurance services to the captive MIs.” PHH Mortgage and Atrium may, therefore, still prevail in this class action.

The court also rejected the defendants’ defenses regarding compliance with governing law and the filed rate doctrine, standing arguments, and their motion for class decertification.

Efrain Munoz et al. v. PHH Mortgage Corp. et al., No. 1:08-cv-00759-DAD-BAM (E.D. Cal. August 12, 2020).