Antitrust Law Daily Wrap Up, ANTITRUST—MDFla: Force-Placement of Insurance Policy with Affiliated Firm Might Violate Anti-Tying Provisions of Bank Holding Company Act, (Jan 24, 2013)

By John W. Arden, J.D., LLM.

A residential mortgage lender and servicer’s purchase of a $250,000 flood insurance policy from an affiliated company for a property with a loan balance of $108,000 might have violated the anti-tying provisions of the Bank Holding Company Act and the corresponding Florida statute, according to the federal district court in Tampa (Gordon v. Chase Home Finance, LLC, January 22, 2013, Covington, V.). The court denied a motion to dismiss the borrowers’ claims for violation of the statutes, for breach of contract, and for breach of the implied covenant of good faith and fair dealing.

Ruth Gordon and Anthony Arango owned a home in Tampa, Florida. In 2003, they refinanced their home with a mortgage from Washington Mutual Bank. The loan was later assigned to JPMorgan Chase Bank, N.A., with servicing delegated to Chase Home Finance, LLC.

Chase Home Finance requires borrowers to purchase acceptable flood and hazard insurance on residential property securing its loans. When borrowers do not obtain such insurance, Chase Home Finance purchases insurance for the borrowers. This practice is known as “force-placement.”

The mortgage in question contained provisions describing the flood insurance requirements and the manner in which Chase Home Finance may force-place insurance policies. According to the mortgage, the “[l]ender may purchase such insurance from or through any company acceptable to Lender including, without limitation, an affiliate of Lender, and Borrower acknowledges and agrees that Lender’s affiliate may receive consideration for such purchase.” Later on, the provision states that “[b]orrower acknowledges that the cost of the insurance coverage so obtained might significantly exceed the cost of insurance that Borrower could have obtained.”

In 2011, when the borrowers’ loan balance was $108,000, Chase Home Finance decided they needed $250,000 in flood insurance coverage and forced-placed them into a high-premium policy through its sister corporation Chase Insurance Agency, according to the borrowers.

The borrowers brought an action against Chase Home Finance and JP Morgan Chase Bank on September 1, 2011, alleging breach of contract, breach of fiduciary duty, violation of the anti-tying provisions of the Bank Holding Company Act, and violation of the Truth in Lending Act. They sought $5 million in damages, injunctive relief, and an award of attorney fees. The defendants filed a motion to dismiss. The district court granted in part and denied in part the motion.

Bank Holding Company Act

The borrowers sought damages for an alleged violation of the anti-tying provisions of the Bank Holding Company Act, which prohibits a bank from extending credit on the condition that the customer obtain some additional credit, property, or service from the bank, its holding company, or a subsidiary of the holding company. They claimed that the language of the mortgage allowing the lender to purchase insurance from an affiliate violated the Bank Holding Company Act and the corresponding Florida statute because the condition that the lender be allowed to force-place flood insurance through its holding company’s subsidiary—and charge the borrower for it—was a condition on the extension of credit.

To state a claim under the Bank Holding Company Act, one must show that there was a condition placed on the extension of credit or provision of any bank service and that the condition was (1) an unusual banking practice; (2) an anti-competitive tying arrangement; and (3) a practice that benefits the bank.

The defendants argued that the federal and state laws did not apply to this conduct and, even if they did, the borrowers failed to allege any violation. The court rejected the argument that the statutes did not apply, holding that even though the defendants were not the loan originators, they could be held liable as loan servicers.

Under antitrust law, a tying arrangement requires an agreement by a party to sell one product (the “tying” product) on the condition that the buyer also purchases a different (or “tied”) product. Similarly, an anti-tying violation under the Bank Holding Company Act requires (1) the existence of two separate products—a “tying” product and a “tied” product—and (2) the forcing of the buyer to purchase the “tied” product to get the “tying” product. In addition, the complained-of practice must be an unusual banking practice, shown to be an anti-competitive tying arrangement that benefits the bank.

The borrowers contended that the tied product was Chase Insurance’s service of acting as an insurance agent for force-placed insurance and that the tying product was the defendants’ service of purchasing insurance on borrowers’ behalf, the initial extension of credit, and the continuing extension of credit. They further claimed that the alleged conduct was unusual, anticompetitive, and benefitted the bank.

The defendants provided a line of cases, indicating that it is not unusual or anti-competitive for a bank to condition a loan on measures designed to protect the bank’s investment, including the requirement that borrowers insure the property.

“However, this is not a simple case of a bank requiring property insurance and Plaintiffs’ Bank Holding Company Act claims are not predicated upon Defendant’s insurance coverage requirements,” the court observed. “Rather, Plaintiffs focus on an elaborate, alleged kickback scheme implicated when the borrower failed to secure adequate flood insurance.”

The borrowers had alleged specific conduct which, if proven, could support their requests for declaratory relief and damages under the Bank Holding Company Act and the corresponding Florida statute, the court ruled. Thus, the court denied the motion to dismiss the claims.

Other Claims

The court likewise denied the motion to dismiss the borrowers’ claims for breach of contract and breach of the implied covenant of good faith and fair dealing. However, it dismissed the claim that the defendants violated the Truth in Lending Act and struck the borrowers’ jury demand.

The case is No. 8:11-cv-2001-T-33EAJ.

Attorneys: Alexander P. Owings (Owings Law Firm) for Ruth Gordon. Cory W. Eichhorn (Greenberg Traurig, LLP) for Chase Home Finance, LLC. Stephen R. Meinertzhagen (Burke, Warren, MacKay & Serritella, PC) for JPMorgan Chase Bank, N.A.

Companies: Chase Home Finance, LLC; JPMorgan Chase Bank, N.A.

Cases: Antitrust FloridaNews