A class of JPMorgan Chase customers claims the bank and its affiliate Cross Country Insurance took millions of dollars in illegal kickbacks and “an unlawful split of private mortgage insurance premiums paid by JPMorgan’s customers” to private mortgage insurers.
The five named plaintiffs were purchasers of private mortgage insurance and claim JPMorgan spun a “captive reinsurance scheme,” in violation of the Real Estate Settlement Procedures Act (RESPA).
“Captive reinsurance schemes such as that involving defendants is widespread throughout the mortgage lending marketplace. As American Banker magazine recently reported in connection with an investigation by the Inspector General of the Department Housing and Urban Development (‘HUD’), ‘beginning in the late 1990s major US banks began coercing [private mortgage] insurers into cutting them in on what would ultimately amount to $6 billion of insurance premiums in exchange for assuming little or no risk,’ ” the federal complaint states.
“This was accomplished through a secretive ‘pay-to-play scheme,’ that utilized carefully crafted excess-of-loss or ‘purported’ quota-share reinsurance contracts that minimized risk exposure to bands of losses unlikely to be pierced. Further … even with regard to the purported band of exposure, certain lenders, including JPMorgan, insulated themselves from providing any real reinsurance by: (a) making their captive reinsurance arrangements ‘self-capitalizing,’ in that they were required to put only ‘nominal initial capital’ into the trusts supporting the reinsurance contracts and (b) providing no recourse for the failure to adequately fund the trusts,” the complaint states.
The plaintiffs say the arrangement was a safe bet for JPMorgan, which had “no risk of meaningful losses.”
“The hundreds of millions of dollars paid by the defendant private mortgage insurers and collected by JPMorgan through its captive reinsurer have clearly not been commensurate to its actual risk exposure. The defendant private mortgage insurers have paid, and JPMorgan has received, hundreds of millions of dollars in ceded premiums, while JPMorgan has borne little or no risk of loss.
“In reality, defendants’ captive reinsurance arrangements were and are sham transactions providing for the transfer of kickbacks and unearned fees in violation of RESPA.
“The money JPMorgan collected from the defendant private mortgage insurers through Cross Country far exceeded the value of the services, if any, it performed,” the complaint states.
Private mortgage insurance, which protects a lender from default, is typically chosen by the bank itself.
The JP Morgan customers say that under RESPA lenders and their affiliates cannot accept kickbacks, referral fees or an unearned fee split from private mortgage insurers.
To skirt the law, each private mortgage insurer paid a share of “borrowers’ private mortgage insurance premiums to Cross Country in the form of purported ‘reinsurance’ premiums,” according to the class.
“While these payments to Cross Country are purportedly for ‘reinsurance’ services, Cross Country receives these payments while assuming very little or no actual risk under its contracts with the private mortgage insurers. From the beginning of 2004 through the end of 2008, Cross Country collected from private mortgage insurers at least $428 million as its ‘share’ of borrower’s private mortgage insurance premiums. In contrast, Cross Country’s ‘share’ of paid claims during this time period was only approximately $7 million,” the complaint states.