U.S. Third Circuit Court of Appeals yesterday overturned  a lower court decision to dismiss a case against Countrywide that alleges the company was behind a nearly $900 million reinsurance kickback scheme which potentially affected hundreds of thousands of borrowers in clear violation of the Real Estate Settlement Procedures Act (RESPA).

The decision noted that Countrywide required homebuyers who took out mortgages with less than a 20% down payment to obtain private mortgage insurance. The insurance could only be obtained from one of seven private mortgage insurers approved by Countrywide.

According to the complaint, the insurers were selected for each borrower by Countrywide without regard to price, terms or quality of the insurance product. Instead, the insurer was assigned to each prospective borrower on a simple rotating basis.

Countrywide then required the assigned mortgage insurer to reinsure their policies with Balboa, a Countrywide subsidiary also known as a "captive reinsurer."  In their decision, the three-judge Third Circuit panel noted that the reinsurance premiums were alleged to be “kickbacks to Countrywide by the primary insurer, in return for Countrywide’s referral…”  Plaintiffs have calculated that, during the years 2000 through 2006, Balboa collected $892 million in reinsurance premiums and paid nothing in claims.

As a result of this scheme, according to the complaint, borrowers were overcharged for mortgage insurance and, as discussed in the Third Circuit decision, subjected to home loan settlement services tainted by unlawful kickbacks and non-competitive referrals of vital business.

Under the RESPA statute,  if successful, plaintiffs and the putative class of affected Countrywide borrowers could be entitled to treble damages equal to three times the amount paid for their private mortgage insurance.

It's also worth noting that several similar "PMI Kickback" cases have been stayed pending the outcome of the Countrywide action — those include litigation against Washington Mutual, GMAC and Wells Fargo for their own roles in violating RESPA with regards to their own captive PMI reinsurance schemes.

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