A lawsuit that accuses both Citigroup (NYSE: C) and MidFirst Bank of Oklahoma City of forcing homeowners to purchase flood insurance in excess of amounts required by law may advance, a federal judge in Utica, N.Y., has ruled.
The banks must face allegations by Gordon Casey, a borrower in Syracuse, N.Y., and Duane Skinner, a borrower in Maryland, of wrongdoing in the force-placing of flood insurance on their homes, U.S. District Judge David Hurd held Wednesday.
The men, who filed their lawsuit in May on behalf of themselves and other borrowers whose mortgages are serviced by affiliates of Citigroup and MidFirst Bank, allege that the banks forced them to purchase flood insurance in amounts that exceeded legal limits.
Casey, whose home is located in an area designated by the Federal Emergency Management Agency as a flood zone, charges that Citigroup accepted his maintaining insurance in the amount of his $25,000 mortgage loan for roughly eight years starting in 2002 before later force-placing an additional $107,780 of coverage while deducting payment for the premiums on the policy from Casey's escrow account. Casey says that MidFirst force-placed roughly $50,000 more insurance in 2011 after the company took over servicing of the loan from Citigroup.
Skinner, who had a $142,000 mortgage loan, charges Citigroup with force-placing $250,000 worth of flood insurance after his first lender processed the loan without requiring Skinner to obtain coverage. He also charges the bank with threatening to foreclose on his property over payments for flood insurance despite his being current on his mortgage payments.
Both men also charge Citigroup and MidFirst with receiving commissions and kickbacks from the American Security Insurance Company, which sold the policies the banks allegedly forced the men to obtain.
Shanon Carson, a lawyer for the plaintiffs, said in a news release that the banks had engaged "in a classic bait-and-switch, in which borrowers are informed of one set of flood insurance requirements at closing and then, later, the banks demand additional, unwanted flood insurance coverage."
In their motion to dismiss the case, both banks contended that the agreements that set forth the terms of the mortgage loans allowed the lenders to determine the amounts of insurance borrowers were required to maintain on the properties. The banks also alleged that the amounts of insurance they required were consistent with recommendations of both FEMA and banking regulators.
In allowing the lawsuit to proceed, Judge Hurd ruled that the mortgage agreements could be read to support the borrowers' claims. He also held that the borrowers had presented legally sufficient allegations the servicers had "exhibited bad faith by force-placing unnecessary or excessive flood insurance — either without the contractual authority to require such insurance or as an arbitrary or irrational exercise of their discretion to do so — and by taking commissions and/or kickbacks related to the force-placed insurance."
The lawsuit "contains clear allegations that defendants misrepresented the amount of flood insurance required under the mortgage agreements, initially accepted a lesser amount of coverage, and failed to provide proper notice and disclosure before force-placing unauthorized and excessive flood insurance on plaintiffs' properties," Hurd wrote in his opinion.
Citigroup spokesman Mark Rodgers said in an email that contrary to the borrowers' allegations "which the court was required to accept as true, we do not receive a commission for lender-placed flood insurance."
Rodgers added that federal law requires lenders "to enforce the purchase of flood insurance for as long as the property remains in one of those flood zones" and that the bank abides by federal rules that allow borrowers to buy their own insurance "before we are required to purchase it on their behalf."
Citigroup also points to a friend-of-the-court brief filed in December by the U.S. government in a case before the U.S. Court of Appeals for the 1st Circuit in which the government contended that federal rules authorize lenders to assess the risk of flood to properties that secure their loans and to determine the amount of insurance necessary to protect their investment.
A lawyer for MidFirst did not respond immediately to a request for comment on the ruling, which gives the banks until Jan. 18 to answer the charges against them.