Court Dismisses RESPA Claim Alleging Illegal Kickbacks Involving Reinsurer
October, 2011
Plaintiffs filed a class action lawsuit under the Real Estate Settlement Procedures Act ("RESPA"), 12 U.S.C. §§ 2601, et seq., against WMB, Washington Mutual, Inc., Washington Mutual Bank FSH and WM Mortgage Reinsurance Company, alleging the collection of illegal kickback payments in the form of excessive reinsurance premiums. See Alexander, et al. v. Wash. Mut., Inc., et al., 2011 WL 2559641 (E.D. Pa). Each plaintiff alleged that he purchased primary mortgage insurance from an insurer with whom WMB had a captive reinsurance arrangement. Id. at *1. Specifically, Plaintiffs argued that the bank would guide its residential loan customers needing primary mortgage insurance to a primary mortgage insurance provider of its choice. In return, the primary mortgage insurance providers allegedly paid a portion of the premiums received from the borrowers to WM Reinsurance, a captive reinsurer and wholly owned subsidiary of WMB. Plaintiffs allege that the payment received by the captive reinsurer did not commensurate with its actual risk exposure and instead was a "sham" transaction that allowed WMB to collect illegal kickbacks in return for referring borrowers to certain primary mortgage insurance providers. Id.
RESPA § 2607(a) provides in relevant part that "[n]o person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding . . . that business incident to or a part of a real estate settlement service involving a federally related mortgage shall be referred to any person." 12 U.S.C. § 2607(a). Subsection (d) allows for the imposition of statutory penalties and attorney's fees and Plaintiffs sought such statutory penalties and attorney's fees. 12 U.S.C. § 2607(d).
However, after Plaintiffs filed their Complaint, WMB failed and the Federal Deposit Insurance Corporation ("FDIC") was appointed as receiver for WMB. The FDIC substituted into the action for WMB, moved to dismiss Plaintiffs' Complaint on the grounds that the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), and in particular, 12 U.S.C. § 1825(b)(3), prevented the award sought by Plaintiffs. Granting the motion, the District Court concluded that 12 U.S.C. § 1825(b)(3) precluded Plaintiffs from recovering penalties from FDIC-receiver. 12 U.S.C. § 1825(b)(3) provides that the FDIC as receiver "shall not be liable for any amounts in the nature of penalties or fines, including those arising from the failure of any person to pay any real property, personal property, probate, or recording tax or any recording or filing fees when due." 12 U.S.C. § 1825(b)(3).
The District Court determined that the "plain language of the FIRREA clearly prohibits the application of all penalties against the FDIC as receiver." Alexander, 2011 WL at *2. The District Court further held that the recovery sought by Plaintiffs pursuant to RESPA constitutes a penalty. Id. at *4. Notably, while the District Court acknowledged a compensatory element to the damages imposed under 2706(d)(2), it noted that the intent of relief imposed under that statute was to punish wrongdoers and applied in this situation would only work to deprive other potential claimants of WMB from recovering. Id. at *4-5. Accordingly, the District Court dismissed Plaintiffs' claim for failure to state a claim upon which relief can be granted.
Learning Point: While Plaintiffs with claims against failed banks may ultimately be compensated for their losses, they are barred from recovering penalties from FDIC-receivers who subsequently take over for the failed institutions.
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