Flagstar Bank Hit With Class Action Over Captive Reinsurance Scheme

Flagstar Bank, FSB was hit with a class action lawsuit in a Pennsylvania federal court by a group of borrowers alleging that the bank engaged in a pay-for-play captive reinsurance scheme involving illegal kickbacks for the lender.

Plaintiffs Martinique Gordon and Verol Gordon, Michael Roy and Janet Roy, and Susan Wolf and Steven Wolf all claim in their class action lawsuit filed on July 2, that they were defrauded by Flagstar Bank and its affiliate, Flagstar Reinsurance Company, by making them pay for the alleged “kickbacks and referral payments premiums” that the bank paid to a group of private mortgage insurers.

Those private mortgage insurers named in the captive reinsurance class action lawsuit include Republic Mortgage Insurance Company, Mortgage Guaranty Insurance Corporation, Radian Guaranty Inc., and Genworth Mortgage Insurance Corporation.

All of the named plaintiffs claim that they have mortgage loans through Flagstar Bank and its affiliates beginning on Jan. 1, 2004 to the present. As borrowers with Flagstar, they also purchased private mortgage insurance as part of the captive mortgage reinsurance arrangements that Flagstar Bank had made with mortgage insurers.

The borrowers explain in their class action lawsuit that captive reinsurance schemes, such as the one that Flagstar bank and the insurers are allegedly involved in “were designed and implemented by mortgage lenders and were intended to, and did in fact, mislead and deceive borrowers.”

Captive reinsurance schemes reportedly allow lenders to receive a cut of insurance premiums while taking on little to no risk, the plaintiffs explain in their Flagstar captive reinsurance class action lawsuit.

“This was accomplished through a secretive ‘pay-to- play scheme’ that utilized carefully crafted excess-of-loss reinsurance contracts that identified ‘bands of losses’ for which there was purported risk exposure or purported ‘quota-share’ reinsurance with the intent that the reinsurer would not actually be exposed to any real reinsurance risk,” the class action lawsuit says.

“Further, even with regard to the purported band of exposure, certain lenders, including Flagstar Bank and their mortgage lending subsidiaries and/or affiliates, 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,” it adds.

The borrowers cite the banking news website American Banker, which has described such captive reinsurance arrangements as an agreement in which “the banks were supposedly providing catastrophic reinsurance, but the policies appeared to render it impossible that they’d ever suffer significant losses. In the event of catastrophic losses, a bank could simply walk away from its nominal initial investment and leave the insurer to bear the other costs.”

“In other words, these lenders—including Flagstar Bank and its mortgage lending subsidiaries and/or affiliates—were ‘playing with the house’s money’ with no risk of meaningful losses,” the captive reinsurance class action lawsuit says.

As a result, American Banker explained, “If defaults remained low, banks would pocket large premiums without paying any claims; if defaults were high, banks’ losses would be capped at the amount of their small initial investments, plus the premiums paid by homeowners and passed along to them by their mortgage insurance partners.”

If someone buys a home and doesn’t make a down payment of at least 20 percent, he or she is typically required to buy private mortgage insurance. This is a protection for the lender, if the the borrower defaults on the loan.

“Flagstar Bank selected the private mortgage insurance provider for borrowers whom it required to have private mortgage insurance, limiting its selection to the private mortgage insurers, who agreed to participate in the fraudulent scheme with [Flagstar] and the other Private Mortgage Insurers,” the class action lawsuit explains.

The plaintiffs claim that the captive reinsurance scheme that Flagstar engaged in violated racketeering laws as described in the Racketeer Influenced and Corrupt Organizations Act (RICO), which included acts of mail and wire fraud.

The plaintiffs are represented by Peter A. Muhic, Edward W. Ciolko, Terence S. Ziegler, Amanda R. Trask, Ethan J. Barlieb, Natalie Lesser of KESSLER TOPAZ MELTZER & CHECK, LLP.

There is no attorney information available for the defendants at this time.

The Flagstar Bank Captive Reinsurance Class Action Lawsuit is Martinique E. Gordon et al. v. Flagstar Bank, FSB, Case No. 3:02-at-06000-UN in the U.S. District Court, Middle District of Pennsylvania.