PITTSBURGH - Two Western Pennsylvania men are among the plaintiffs in a class action suit that accuses one of the top banking companies in the world of establishing an illegal racketeering scheme that allowed it to make millions in kickbacks while taking minimum risk as an investor in mortgage insurance companies.
According to the complaint filed at the U.S. District Court for the Western District of Pennsylvania, Bank of America has pocketed more than $280 million by sharing mortgage insurance premiums between 2004 and 2011, while being liable for only approximately $39 million in claims. The claim says that money was primarily funded through mortgage insurance premiums paid by borrowers such as William Weiss and Robert Lessman of Greensburg.
The defendants, including Bank of America and its subsidiaries, are accused in the class action of conducting a pattern of wire fraud and racketeering activity under RICO statutes. The action seeks a declaratory judgment ruling the actions unlawful and full restitution of mortgage insurance premiums to members of the class.
Typically, when a mortgage-seeker cannot cover a 20 percent down-payment for the purchase of a home, the lender will require a mortgage insurance premium to protect its investment, the complaint says.
Weiss and Lessman entered into such an agreement when they purchased their Greensburg home in 2006, adding an additional $25 to their monthly payment.
According to the complaint, Bank of America has followed the practice used by many financial institutions and created a reinsurance subsidiary to enter into contracts with third party mortgage insurance providers.
In exchange for a steady stream of business, the mortgage insurance providers agree to share a percentage of the premiums, the complaint says.
The complaint argues not only that the agreements offer little opportunity for the borrowers to shop around for cheaper insurance premiums, but also the premium payments contribute to an illegal kickback scheme that unjustly enriches Bank of America.
The class action further states that Bank of America has protected itself from incurring heavy losses from defaults by entering into an excess-of-loss agreement with the insurance company. Under the agreement, the bank is only liable for claims over a certain percent, with a ceiling that prevents any large financial hits, the complaint says.
"Under this structure, then, the reinsurer’s liability begins, if ever, only when the private mortgage insurer’s incurred losses reach the attachment point and ends when such losses reach the detachment point," the claim says.
"The absence of any likelihood that the reinsurer will experience real losses reveals the reinsurance agreement between the reinsurer and primary private mortgage insurer to be a sham."
The claim says that the payment of these kickbacks to lenders have forced the mortgage insurance providers to inflate the premiums and pass the costs to the homeowners.
The plaintiffs argue that they have been subjected to violations of the Real Estate Settlement Procedures Act of 1974 and seek statutory damages pursuant to the Racketeer Influenced and Corrupt Organizations Act.
Members of the class have been defined as persons who obtained a residential mortgage loan from Bank of America between Jan. 1, 2004 and the present and purchased mortgage insurance from a party who also held a captive reinsurance contract with Bank of America.
The action has been entered into Pennsylvania federal court by attorneys from Stephen J. O'Brien & Associates and Kessler, Topaz, Meltzer & Check, LLP.
The federal case ID is 2:15-cv-00062-CB.