Antitrust Law Daily Wrap Up, RICO—D.N.J.: Mortgage servicer precluded from using filed-rate doctrine to bar claims, (Apr 11, 2016)

By Edward L. Puzzo, J.D.

The filed-rate doctrine cannot be used to shield mortgage servicers from potential RICO liability when they are charged with force-placing hazard insurance with an insurer co-conspirator in order to reap unjustified profits in the form of payments disguised as legitimate fees, the federal district court in Camden, New Jersey has ruled (Burroughs v. PHH Mortgage Corporation, April 8, 2016, Hillman, N.).

Force-placed insurance. Plaintiffs Joseph and Leslee Burroughs' putative class action was based on the policies of mortgage servicer PHH Mortgage Corporation regarding force-placed insurance and lender-placed insurance (FPI/LBI). As a condition of granting a mortgage loan to borrowers, borrowers are commonly required to agree to maintain hazard insurance on the subject property, and if they do not, to allow mortgage servicers to purchase (force-place) the insurance policies for them, charging the borrowers for the cost. Plaintiffs alleged that when PHH Mortgage purchased such force-placed policies, they did so through Assurant, Inc. subsidiaries, at a greater cost to the borrowers, because there was a financial benefit to them, in the form of so-called expense reimbursements, below-market-rate portfolio tracking, subsidized mortgage servicing and other consideration. One of plaintiffs' allegations against PHH Mortgage was that their actions violated the Racketeer Influenced and Corrupt Organizations Act (RICO).

Filed-rate doctrine. PHH Mortgage alleged that the rates it charged borrowers for FPI/LBI policies were approved by a governmental regulatory agency and therefore the filed-rate doctrine barred these claims. That doctrine provides that a rate filed with and approved by a governing regulatory agency is unassailable in judicial proceedings brought by rate payers.

The 2009 Third Circuit case of Alston v. Countrywide Fin. Corp, 585 F.3d 753 made a distinction between claims that challenged the rate the mortgage servicer charged for FPI/LBI policies, and claims that challenged the mortgage servicer’s allegedly unlawful conduct rather than the rate itself. In a similar case against PHH Morgage, Gallo v. PHH Mortgage Corp., 916 F. Supp. 2d 537, (D.N.J. 2012), that court found that the allegation that PHH Mortgage received various improper financial benefits from the FPI/LBI placement process was a challenge to the unlawful conduct, not the rate, so the filed-rate doctrine did not apply. PHH Mortgage argued, however, that the court should follow the precedent of the Second Circuit, which in Rothstein v. Balboa Ins. Co., 794 F.3d 256 (2d Cir. 2015) interpreted the filed-rate doctrine broadly to cover rates approved by both federal and state regulators, regardless of the nature of the cause of action.

Alston controls. The court declined to depart from the Alston ruling. First, the ruling in Alston was binding in the Third Circuit. Second, the court found the reasoning in Alston more persuasive than the reasoning in Rothstein. The Second Circuit’s fear—that absent the filed-rate doctrine, judicial action would undermine agency rate-making authority—was not a concern when a mortgagee challenges his mortgage servicer’s relationship with the insurer and their scheme of hiding the nature of fees under the guise of regulatory-approved rates, the court stated.

What was being challenged here was not the rate itself, the court continued, but the mortgage servicer’s alleged exploitation of its ability to force-place hazard insurance in order to reap additional, unjustified profits in the form of payments disguised as purportedly legitimate fees. The protection of the filed rate doctrine should not used to shelter mortgage servicers and their co-conspirator insurers from liability for their fraud, if such fraud can be proven. Therefore, PHH Mortgage’s motion to dismiss plaintiffs’ claims based on the filed rate doctrine must be denied, the court ruled.

The case is Civil Action No. 1:15-cv-06122-NLH-KMW.

Attorneys: Peter A. Muhic, Samantha E. Jones, Tyler Stephen Graden, and Donna Siegel Moffa (Kessler Topaz Meltzer & Check, LLP) for Joseph Burroughs and Leslee Burroughs. Peter J. Leyh (Braverman Kaskey PC) and Mitchel H. Kider, David M. Souders, and Bruce A. Alexander (Weiner Brodsky Kider PC) for PHH Mortgage Corporation.

Companies: PHH Mortgage Corporation

Cases: RICO NewJerseyNews