On February 25, 2011, the Washington insurance law attorneys at M&S and co-counsel filed a lawsuit in U.S. District Court for the Eastern District of Pennsylvania on behalf of a class of homeowners against SunTrust Bank. The Complaint alleges that SunTrust had agreements with Private Mortgage Insurance (PMI) companies to receive illegal kickback fees for arranging PMI with these insurers.
Typically, when a home is purchased with less than a 20% down payment, the lender will require the borrower to purchase PMI. PMI protects the lender in case of a default on the loan by the borrower. Borrowers typically have no choice in their PMI provider and cannot comparison shop for price.
The allegations in this case regard a scheme carried out under the guise of so-called “captive reinsurance” by which a SunTrust subsidiary — its “captive reinsurer” — receives a portion of the borrower’s monthly PMI premium payments ostensibly for sharing in the risk of default on loans. However, the deal is structured such that SunTrust actually assumes little to no risk. Thus, the complaint alleges that the payment is essentially a kickback or a referral fee. The complaint asserts that SunTrust collected millions of dollars through its captive reinsurance scheme, a sum that far exceeded the value of any services provided.
The Real Estate Settlement Procedures Act (“RESPA”) prohibits lenders from accepting kickbacks or referral fees from any person providing a real estate settlement service, including providers of PMI. In other words, a lender cannot legally – directly or indirectly – accept a referral fee from the insurer providing the PMI on the borrower’s loan. The complaint alleges that SunTrust and its PMI partners attempted to circumvent RESPA’s prohibition against kickbacks and unearned fees by arranging for PMI providers to pay a portion of borrowers’ PMI premiums to SunTrust through its subsidiary captive reinsurer and through other agreements with PMI insurers.