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Kickbacks alleged in mortgage insurance lawsuit

"We believe our products and service are provided at a fair market value."

Thousands of homeowners could benefit from a class action lawsuit filed recently in Augusta, Ga. Four mortgage insurance companies have been named in the suit, which alleges illegal kickbacks to lenders.

Specifically, the lawsuit alleges that the companies provided mortgage lenders with products and services, such as pool policy coverage and underwriting, at below market price. Pool policy coverage is a type of insurance that mortgage companies are required to purchase to help safeguard the pool of loans they make.

In return for those and other considerations, the suit alleges, lenders referred mortgage insurance business to Mortgage Guaranty Insurance Corp., PMI Mortgage Insurance Co., Republic Mortgage Insurance Co., and United Guaranty Corp.

Prosecuting attorneys are asking that those mortgage insurance companies pay the affected homeowners three times the amount those homeowners paid for mortgage insurance. Under the terms of the lawsuit, any homeowner who obtained primary mortgage insurance from one of the four named companies, for either a single- or multiple-family home, on or after Jan. 1, 1996, could be eligible.

"The lawsuit alleges that our company violated the anti-kickback provision of RESPA [The Real Estate Settlement Procedures Act]," says a company spokesperson for PMI Mortgage Insurance Co.

RESPA is a federal law that requires certain disclosures to consumers about mortgage loan settlements. Section 8 of RESPA prohibits anyone from giving or accepting a fee, kickback, or anything of value in exchange for referrals of settlement service business involving a federally related mortgage loan. In addition, RESPA prohibits fee-splitting and receiving unearned fees for services not actually performed.

"The allegation is that we have provided certain products and services at below costs, in return for business," the PMI Mortgage Insurance Co. spokesperson states, adding that they deny the allegations. "We believe our products and service are provided at a fair market value."

Prosecuting attorneys counter that there has been widespread industry acknowledgement and criticism of the kickback practice. They also believe they have some leverage in the case, including a letter from HUD General Counsel Gail Laster, which states that "providing a below-market pool policy in return for referrals of business is impermissible under RESPA."

Under Georgia law, however, prosecuting attorneys say they could not speak on the record about the case.

Violations of section 8 of RESPA are subject to both criminal and civil penalties. In a criminal case, a person may be fined up to $10,000 and imprisoned up to one year. In a private lawsuit, a defendant may be liable to the person charged for the settlement service for an amount equal to three times the fee paid for the service.

Prosecutors are asking for a trial by jury. A trial date has not yet been set.

Meanwhile, the PMI Mortgage Insurance Co. spokesperson argues that consumers could ultimately be the losers in the legal action. "The mortgage insurance industry provides a variety of products and services to lenders, that lenders use to deliver more efficient and less costly services to consumers," he explains. "If the lawsuit succeeds, it could, ironically, end up increasing costs to consumers."

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