3rd Circ. Resuscitates Countrywide Kickback Case

By Erin Coe

Law360, New York (October 28, 2009) -- A federal appeals court has revived a dismissed proposed class action brought by homebuyers accusing Countrywide Home Loans Inc. and its reinsurer unit, Balboa Reinsurance Co., of engaging in a kickback scheme that could reduce competition among private mortgage insurance providers.

The U.S. Court of Appeals for the Third Circuit on Wednesday reversed a lower court’s dismissal of the complaint for lack of jurisdiction, holding that the Real Estate Settlement Procedures Act allows for a private right of action even if there is no overcharge allegation.

RESPA prohibits any kickbacks or unearned fees as part of a real estate settlement service and allows private actions seeking “an amount equal to three times the amount of any charge paid for such settlement service” against violators.

The plaintiffs in 2005 and 2006 obtained home mortgages from Countrywide, which has since been acquired by Bank of America Corp., but because the plaintiffs made down payments of less than 20 percent, the lender required them to obtain private mortgage insurance and referred them to insurers that would reinsure their policies with Countrywide affiliate, Balboa, under a so-called captive reinsurance arrangement.

The homebuyers brought suit in the U.S. District Court for the Eastern District of Pennsylvania, alleging that these arrangements were essentially kickback schemes and seeking treble damages under RESPA.

Their case claimed that Balboa has collected more than $892 million in reinsurance premiums since 1999 while paying nothing in claims, and that the premiums paid to Balboa were kickbacks to Countrywide by primary insurers in return for referrals.

The plaintiffs asserted that the arrangements were an injury for purposes of Article III standing even if they did not result in overcharges because the arrangements could still harm consumers by keeping premiums for private mortgage insurance artificially inflated and by decreasing competition among private mortgage insurance providers.

The district court granted Countrywide’s bid to dismiss, noting that the plaintiffs lacked standing to allege that they paid an artificially inflated rate. The district court also held that RESPA’s damages provision authorized the plaintiffs to sue only when they had been overcharged, relying in part on a decision in Carter v. Welles-Bowen Realty Inc. that was later reversed by the Sixth Circuit.

On Wednesday, the Third Circuit found the plain language of RESPA did not require the plaintiffs to allege an overcharge. It noted that none of the provisions contained the word “overcharge” or implied that plaintiffs must allege that they paid more than they would have otherwise.

“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 Third Circuit said.

The Third Circuit said it agreed with the conclusion of the Sixth Circuit in Carter that the definition of “any” charge in the RESPA section means that charges are not limited to a particular type of charge, like an overcharge.

“A homebuyer is entitled to three times any charge paid, but only for the service connected to the kickback or fee-split,” the Third Circuit said.

The Third Circuit held that the plaintiffs had suffered an injury sufficient to support Article III standing and rejected Countrywide’s argument that the plaintiffs’ claims were barred by the filed rate doctrine.

Edward Ciolko, an attorney representing the plaintiffs, hailed the Third Circuit for following the Sixth Circuit’s holding, and said consumers faced with inherently opaque real estate settlements have the right under RESPA to be compensated for harm if they are subjected to abusive business practices, such as kickbacks.

“These abusive practices limit competition and increase prices over time, and they are what RESPA is intended to address,” he said.

An attorney representing Countrywide was unavailable for comment.

The plaintiffs are represented in this matter by Barroway Topaz Kessler Meltzer & Check LLP and Travis & Calhoun.

Countrywide and Balboa are represented by Goodwin Procter LLP and Ballard Spahr Andrews & Ingersoll LLP.

The case is Mary Alston et al. v. Countrywide Financial Corp. et al., case number 08-4334, in the U.S. Court of Appeals for the Third Circuit.