A lawsuit that accused GMAC Mortgage of taking kickbacks and overcharging homeowners on force-placed insurance policies has survived a motion to dismiss.
GMAC's mortgage unit will have to face a class action brought by homeowners whose properties it serviced, a U.S. District Court judge for the Southern District of New York ruled Monday. The ruling is significant for banks facing similar suits because Judge Alison Nathan refused to throw out a portion of the suit alleging violations of the Racketeer Influenced and Corrupt Organizations, or RICO, Act, and ruled that the plaintiffs can challenge force-placed insurance rates even when they have been approved by state regulators.
The suit was filed last year by Landon Rothstein, who claims that insurer Balboa Insurance Co. paid kickbacks to GMAC, his mortgage servicer, for a force-placed insurance policy that GMAC took out on his home. The kickback inflated the insurance premium, and the cost was later passed on to Rothstein, he claims.
Force-placed insurance is a form of hazard insurance that a lender or servicer buys after the borrower allows the home's policy to lapse. Critics of the practice have alleged that insurers compete for the servicers' business by offering a portion of the profits on the policies - a practice that, the suit alleges, constitutes an improper kickback.
Other defendants named in Rothstein's class action include the insurers MeritPlan Insurance and Newport Management. The suit claims that the companies and GMAC illegally colluded to inflate premiums, violating anti-racketeering charges.
The ruling is a setback for banks and insurance companies hoping to shield themselves from force-placed lawsuits based on the so-called filed-rate doctrine, which bars plaintiffs from claiming that rates that were approved by regulators are unreasonable. Following other recent decisions from federal courts in other force-placed cases, Nathan ruled that regulators have not approved the rates to be passed on directly to the homeowner.
In September New York became the first state to seek a comprehensive ban on kickback-style payments for force-placed insurance. After a two-year investigation, New York's Department of Financial Services found that premiums on force-placed policies can be as much as ten times higher than comparable policies bought by homeowners.