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In a decision that could bring an end to a mini-wave of litigation against mortgage insurance companies, a federal judge in Texas has dismissed a class action suit filed by home buyers that said an insurer was effectively paying “kickbacks” to their mortgage banks. In Moore v. Radian Group, the plaintiffs claimed that Radian Guaranty had violated the anti-kickback provisions of the Real Estate Settlement and Procedures Act (RESPA) by promising below-market rates to lending banks for their “pool insurance” in return for referrals to provide primary mortgage insurance policies when home buyers borrow more than 80 percent of the value of their homes. But a team of defense lawyers from Schnader Harrison Segal & Lewis in Philadelphia argued that the theory of the case was fatally flawed in two ways. The team represented Radian, the second largest financial services institution in the Philadelphia area. Attorneys David Smith and Wendy Beetlestone argued that the plaintiffs lacked standing to sue under RESPA since they couldn’t show any injury in the form of higher premiums for their primary mortgage insurance policies. And, in a sort of legal Catch-22, Smith and Beetlestone argued that if the plaintiffs had claimed that their premiums were higher, their suit would then be barred by the “filed rate doctrine.” Now U.S. District Judge T. John Ward of the Eastern District of Texas has agreed and dismissed the suit, saying the plaintiffs lacked standing since they concede they have suffered no actual injury. Plaintiffs’ lawyers argued that since RESPA specifically outlaws kickback schemes, they did not have to prove that the premiums they paid were increased.Judge Ward disagreed, saying that while federal regulators have declared that kickbacks schemes are illegal even where they don’t result in increased prices, the question of the plaintiffs’ standing to sue in the absence of damages was completely separate. “The question now … is whether Congress intended to allow a private plaintiff to sue for an alleged violation of RESPA’s anti-kickback provision when the plaintiff has not alleged that the referral arrangement increased any of the settlement charges at issue, or that any portion of the charge for the settlement services was involved in the kickback violation,” Ward wrote. Ward’s decision could spell the end of what appeared to be a growing wave of class action lawsuits that challenged relatively common practices in the mortgage industry. In the suits, the plaintiffs described the interplay between two types of mortgage insurance — one low-profit, the other high-profit — and alleged that the insurers set out to pay kickbacks in the low-profit market in order to garner regular referrals for the high-profit policies. According to the suits, lenders that sell loans on the secondary market — to government sponsored entities like Fannie Mae and Freddie Mac — must pay a guaranty fee to mitigate the risk of a borrower’s early default.As an alternative to paying that fee, the lenders may purchase “pool insurance.” Consequently, the suits say, cheaper pool insurance means more profits for the lenders in the secondary market. The “kickbacks” paid by the insurers, the suits allege, come in the form of below-market premiums for pool insurance in return for referrals to sell primary mortgage insurance policies. The theory of the suits is that since the lenders pass the charges for primary insurance policies onto the borrowers, they have no incentive to shop for cheaper rates. In the Moore case, the plaintiffs’ team — attorneys Michael Angelovich of Nix, Patterson & Roach in Texarkana, Texas; Lon D. Packard of Packard, Packard & Johnson in Salt Lake City; and Von G. Packard of the Packard firm’s Los Altos, Calif., office — argued that the borrowers had standing to sue under RESPA because the law was specifically designed to provide civil enforcement of the anti-kickback provisions. As authority, they cited the U.S. Supreme Court’s 1982 decision in Havens Realty Corp. v. Coleman in which the justices held that African-American “testers” who were denied accurate information about the availability of apartments had standing to sue under the Fair Housing Act even though they had no bona fide intent to lease any apartment. But Ward found that the Havens case was distinguishable. The Havens decision, Ward said, was premised on the fact that the Fair Housing Act specifically gave “any person” the right to truthful housing information. The Moore plaintiffs argued that RESPA likewise gives borrowers a statutory right to “truthful real estate settlement practices.” Ward disagreed, saying the plaintiffs sued under RESPA’s anti-kickback provisions which includes no requirement of accurate information at settlement.As a result, Ward said, the plaintiffs cannot avoid the constitutional requirement that they must plead an actual injury in order to establish standing. “The plaintiffs do not rely on any of the disclosure provisions of RESPA. They rely on a specific provision that, by its terms, has nothing to do with the disclosure of truthful real estate settlement practices,” Ward wrote.

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