For years, ambitious class-action lawyers have tried to criminalize the business of captive reinsurance, with varying degrees of success. Recent decisions from federal courts in Pennsylvania and the District of Columbia suggest that these lawsuits’ heyday might finally be over.
In the Pennsylvania case, Menichino v. Citibank, N.A., several mortgage borrowers alleged that their lender violated the Real Estate Settlement Procedures Act (RESPA) though its captive-reinsurance practices. Captive reinsurance refers to an arrangement in which a lender requires a borrower to buy private mortgage insurance (PMI) because that person has less than 20% equity in her home. The PMI insurer then pawns off some of its risk to a reinsurance company that is partly owned by the lender. Critics allege that this is a sham deal, resulting in pure profit to the reinsurer, because no real risk is transferred. This scenario, the Menichino plaintiffs alleged, results in kickbacks that violate RESPA.
In Menichino, the court held that the borrowers’ lawsuit was untimely, and filed outside RESPA’s one-year statute of limitations, because the consumers’ closing paperwork told them about the captive-reinsurance arrangement and they failed to sue within 12 months of learning about that. Menichino thus suggests that class-action lawyers will have more difficulty winning the battle over the timing of captive-reinsurance cases.
In addition, the recent PHH decision from the United States Court of Appeals for the District of Columbia gives courts a means of rejecting captive-reinsurance lawsuits on their merits, not just on procedural grounds (like timing). The PHH opinion affirmed an earlier ruling that held that captive-reinsurance scenarios, also called “tying arrangements,” are lawful as long as the amount paid for reinsurance is reasonable. And the new regime at the Consumer Financial Protection Bureau does not seem eager—much less willing—to argue otherwise.
Of course, outside the District of Columbia, the PHH ruling isn’t binding authority. Nonetheless, other federal courts aren’t likely to go against it.