Insurance Condition May Tie HSBC to Kickbacks

(CN) - HSBC cannot dismiss claims that it got illegal kickbacks for requiring clients to obtain illusory private mortgage insurance from certain insurers, a federal judge ruled.

Headquartered in London, HSBC operates an international network of some 6,600 offices in more than 80 countries and territories.

Moriba Ba leads a federal class action in Philadelphia against HSBC USA, its affiliates and several private mortgage insurers, alleging violations of the Real Estate Settlement Procedures Act of 1974 (RESPA) and common law unjust enrichment.

The plaintiffs claim that, because they made down payments of less than 20 percent on their HSBC home mortgage loans from January 2006 to April 2008, they had to obtain private mortgage insurance from an HSBC-selected insurer - United Guaranty Residential Insurance, Genworth Mortgage Insurance, Republic Mortgage Insurance or Mortgage Guaranty Insurance.

Though HSBC reinsured the private policies under a "captive reinsurance agreement," those services were allegedly illusory in that HSBC Reinsurance assumed no risk and could abandon its purported duties at any time.

Rather, the private insurers paid HSBC a kickback - that is, an illegal "split" of the "reinsurance premiums" clients paid - in exchange for referring its mortgagees to them, according to the complaint.

The defendants filed three motions to dismiss, arguing that the claims are time-barred.

U.S. District Judge Paul Diamond denied the motions June 26, but held that Ba and three other plaintiffs - Donald and Sherrica Chipp and Eugene Murano - lack standing against United Guaranty.

"Because the Chipps, Ba, and Murano do not allege that United Guaranty provided them with mortgage insurance or conspired with other private insurers to cause them harm, it appears that they are without standing," Diamond wrote.

The plaintiffs' unjust enrichment claim survived.

"At this stage, I am unable to determine whether plaintiffs' express contracts with defendants are 'on the same subject' as their claim for unjust enrichment," Diamond wrote.

Although the plaintiffs' loans closed between four and seven years before the complaint was filed -well outside the one-year limitations period - they sufficiently pleaded equitable tolling, the court found.

"Plaintiffs allege that defendants used form mortgage documents, disclosures, and affiliated business arrangements actively to mislead them," Diamond wrote. "Plaintiffs further allege that defendants' actions made it virtually impossible to uncover the true nature of the reinsurance arrangements. Finally, it is alleged that each plaintiff was diligent because he or she fully participated in the loan process and reviewed the documents presented.

"In these circumstances," he added, "I will await summary judgment to determine whether plaintiffs' RESPA claims are untimely."

HSBC had a reported $2.692 trillion in total assets in 2012.

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