The law firm of Kirby McInerney LLP has filed a class action lawsuit in the U.S. District Court for the Southern District of New York against GMAC Mortgage LLC and Balboa Insurance Company in connection with an allegedly unlawful kickback scheme involving force-placed insurance. The case is brought on behalf of a putative class consisting of all residential mortgage borrowers who have been charged costs associated with force-placed insurance in connection with loans serviced by GMAC at any time from March 6, 2003 to the present. The case alleges that GMAC, a mortgage loan servicer, extracted kickbacks or bribes from Balboa, a provider of force-placed insurance coverage, which artificially inflated reimbursements sought by GMAC from borrowers.
Beginning in March 2003, GMAC entered into an agreement to buy force-placed insurance coverage with respect to its mortgage loan servicing portfolio from Balboa. Plaintiff alleges that GMAC, as a quid pro quo for awarding Balboa its force-placed insurance business, has required Balboa to pay GM kickbacks. These kickbacks have been in the form of bogus "commissions" paid to a GMAC affiliate, "GMAC Agency Marketing," an unincorporated division and/or fictitious "doing business as" name of defendant GMAC Insurance Marketing Inc. Plaintiff alleges that Balboa agreed to label these payments as "commissions"—and to funnel them through GMAC Agency Marketing— to disguise their true nature as bribes or kickbacks.
The plaintiff asserts that defendants' kickback scheme has improperly inflated the reimbursements sought from borrowers with respect to force-placed insurance on GMAC-serviced loans. This is because the stated premiums with respect to which GMAC has sought reimbursement have been fraudulently "grossed up" to include the kickbacks. The amounts of the kickbacks have then been repaid by Balboa to GMAC in round-trip transactions that have no legitimate business purpose. The net charge—i.e., the stated premiums minus the kickbacks—represents the true or actual price or cost of the insurance.
The lawsuit alleges that the owners of the loans serviced by GMAC have also been harmed by the kickback scheme. All servicing agreements entitle servicers such as GMAC to recoup any advances they incur from loan proceeds "off the top" before any money is passed through to the owners of the loans. Premiums on force-placed insurance constitute reimbursable servicing advances under all such agreements.
The complaint alleges that GMAC, in its capacity as loan servicer, has reimbursed itself with respect to force-placed insurance based not on its actual costs but instead on the artificially inflated, fraudulently grossed-up premiums charged to borrowers. In other words, it is alleged that GMAC, in recouping its supposed servicing advances before passing money through to the owners of the loans, has not netted out the amounts of the kickbacks that it has received from Balboa, but has instead included the full amounts of the stated premiums, inflated by the kickbacks. As a result, to the extent borrowers have failed to pay, the owners of the loans have borne those fraudulently inflated costs in the form of reduced proceeds and higher loss severities at liquidation. In practice, this means that the profits reaped by GMAC as a result of the scheme alleged herein have come from the pockets of the pension funds that invest in the mortgages in GMAC's servicing portfolio and—in the case of loans in the portfolio owned by Fannie Mae and other government-sponsored enterprises (GSEs).
"The practice of inflating force-placed insurance costs through kickbacks is parasitic, abusive and, we believe, illegal," said Kirby McInerney LLP partner Mark Strauss. "Recently, Fannie Mae clarified that its guidelines have never permitted this practice, which is a form of equity stripping that has saddled taxpayers and homeowners with improper costs, unnecessarily pushed homeowners into foreclosure, and exacerbated the housing crisis."
The complaint alleges claims under the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. Section 1961, et seq., and state law.