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Case 1:12-cv-00375-LJO-SKO Document 1 Filed 03/12/12 Page 1 of 50 1 KESSLER TOPAZ MELTZER & CHECK, LLP 2 Ramzi Abadou (Bar No. 222567) 580 California Street, Suite 1750 3 San Francisco, CA 94104 4 Telephone: (415) 400-3000 Facsimile: (415) 400-3001 5 rabadou@ktmc.com 6 Counsel for Plaintiff 7 [Additional counsel listed on signature page] 8 9 10 UNITED STATES DISTRICT COURT 11 EASTERN DISTRICT OF CALIFORNIA 12 13 LUCAS E. MCCARN, individually and on behalf ) Civil Action No.: of all others similarly situated, ) 14 ) 15 Plaintiff, ) ) 16 v. ) CLASS ACTION COMPLAINT ) 17 HSBC USA, INC., HSBC BANK USA, N.A., ) HSBC MORTGAGE CORPORATION, HSBC ) 18 REINSURANCE (USA) INC., UNITED ) JURY TRIAL DEMANDED 19 GUARANTY RESIDENTIAL INSURANCE CO., ) PMI MORTGAGE INSURANCE CO., ) 20 GENWORTH MORTGAGE INSURANCE ) CORP., REPUBLIC MORTGAGE INSURANCE ) 21 CO., MORTGAGE GUARANTY INSURANCE ) CORP., and RADIAN GUARANTY INC. ) 22 ) 23 Defendants. ) 24 25 26 27 28 Case 1:12-cv-00375-LJO-SKO Document 1 Filed 03/12/12 Page 2 of 50 1 INTRODUCTION 2 1. Defendants HSBC USA, Inc. (“HSBC USA”), HSBC Bank USA, N.A. (“HSBC 3 Bank”) and HSBC Mortgage Corp. (“HSBC Mortgage”), together with their affiliated reinsurer, 4 Defendant HSBC Reinsurance (USA), Inc. (“HSBC RE”) (collectively, “HSBC”), have acted in 5 concert with Defendants United Guaranty Residential Insurance Co., PMI Mortgage Insurance Co., 6 Genworth Mortgage Insurance Corp., Republic Mortgage Insurance Co., Mortgage Guaranty 7 Insurance Corp. and Radian Guaranty Inc. (collectively, the “Private Mortgage Insurers”) (together 8 with HSBC, “Defendants”) to effectuate a captive reinsurance scheme whereby, in violation of the 9 Real Estate Settlement Procedures Act of 1974 (“RESPA”): (a) illegal referral payments in the form of 10 purported reinsurance premiums were paid by the Private Mortgage Insurers to HSBC RE; and (b) 11 HSBC RE received an unlawful split of private mortgage insurance premiums paid by the Private 12 Mortgage Insurers’ customers referred by HSBC entities. 13 2. This is a proposed nationwide action brought by Plaintiff Lucas E. McCarn 14 (“Plaintiff”) on behalf of himself and a class of all other similarly situated persons who obtained 15 residential mortgage loans originated, funded and/or originated through correspondent lending by 16 HSBC Bank and/or HSBC Mortgage or any of their subsidiaries and/or affiliates between January 1, 17 2004 and the present (the “Class Period”) and, in connection therewith, purchased private mortgage 18 insurance and whose residential mortgage loans were included within HSBC’s captive mortgage 19 reinsurance arrangements (hereinafter, the “Class”). 20 3. Captive reinsurance schemes, such as the scheme involving Defendants described 21 herein, have been widespread throughout the mortgage lending marketplace. As American Banker 22 magazine recently reported in connection with an investigation by the Inspector General of the 23 Department of Housing and Urban Development (“HUD”), “beginning in the late 1990s major U.S. 24 banks began coercing [private mortgage] insurers into cutting them in on what would ultimately 25 amount to $6 billion of insurance premiums in exchange for assuming little or no risk.” See Jeff 26 Horwitz, Bank Mortgage Kickback Scheme Thrived Amid Regulatory Inaction, American Banker 27 (Sept. 16, 2011, 7:45 PM), http://www.americanbanker.com/issues/176_181/mortgages-reinsurance- 28 deals-kickbacks-HUD-1042277-1.html, attached as Exhibit A (hereinafter referred to as “Mortgage 1 Case 1:12-cv-00375-LJO-SKO Document 1 Filed 03/12/12 Page 3 of 50 1 Kickback Scheme”); see also Jeff Horwitz, Banks Took $6B in Reinsurance Kickbacks, Investigators 2 Say, American Banker (Sept. 6, 2011, 4:55 PM), http://www.americanbanker.com/…/176_173/ 3 mortgage-reinsurance-respa-kickbacks-hud-investigation-doj-1041928-1.html, attached as Exhibit B 4 (hereinafter referred to as “Reinsurance Kickbacks”).1 5 4. As described in greater detail below, this was accomplished through a secretive “pay- 6 to-play scheme”2 that utilized carefully crafted excess-of-loss or “purported” quota-share reinsurance 7 contracts that minimized risk exposure to bands of losses unlikely to be pierced. Further, as described 8 below, even with regard to the purported band of exposure, certain lenders, including HSBC Bank and 9 HSBC Mortgage, insulated themselves from providing any real reinsurance by: (a) making their 10 captive reinsurance arrangements “self-capitalizing,” in that they were required to put only “nominal 11 initial capital” into the trusts supporting the reinsurance contracts and (b) providing no recourse for the 12 failure to adequately fund the trusts. See Mortgage Kickback Scheme. 13 5. As American Banker described such arrangements: 14 The banks were supposedly providing catastrophic reinsurance, but the policies appeared to render it impossible that they’d ever suffer 15 significant losses. In the event of catastrophic losses, a bank could simply walk away from its nominal initial investment and leave the 16 insurer to bear the other costs . 17 See Mortgage Kickback Scheme. 18 6. In other words, these lenders—including HSBC Bank and HSBC Mortgage—were 19 “playing with the house’s money” with no risk of meaningful losses. As American Banker aptly 20 explained: 21 If defaults remained low, banks would pocket large premiums without paying any claims; if defaults were high, banks’ losses would be 22 capped at the amount of their small initial investments, plus the 23 premiums paid by homeowners and passed along to them by their mortgage insurance partners. In other words, it appeared to be a no- 24 25 1 In fact, “Bank of America recently spent $34 million to settle a RESPA class action suit 26 accusing Countrywide of taking the same mortgage insurance kickbacks alleged by HUD investigators.” See Reinsurance Kickbacks. See also Final Approval Order in Alston v. Countrywide 27 Fin. Corp., No. 07-cv-03508 (E.D. Pa. July 29, 2011) at ECF No. 149. 2 Id. 28 2 Case 1:12-cv-00375-LJO-SKO Document 1 Filed 03/12/12 Page 4 of 50 1 lose proposition for the banks. 2 See Mortgage Kickback Scheme. 3 7. In this action, Plaintiff challenges Defendants’ hidden scheme to circumvent RESPA’s 4 strict prohibition against kickbacks, referral payments and unearned fee splits and seek statutory 5 damages and/or restitution for Defendants’ unjust enrichment. Each Defendant participated in the 6 scheme. 7 8. Homeowners who buy a home with less than a 20% down payment are typically 8 required to pay for private mortgage insurance. See http://www.privatemi.com. Private mortgage 9 insurance protects the lender in the event of a default by the borrower. Id. See also Exhibit C hereto 10 at 1, Proposed EITF Issue titled “Risk Transfer in Mortgage Reinsurance Captive Arrangements,” 11 discussing the purpose of private mortgage insurance. Although the premium is paid by the borrower 12 (either directly or indirectly, as further described below), borrowers typically have no opportunity to 13 comparison-shop or select the provider of the private mortgage insurance. See Reinsurance Kickbacks 14 (“Banks typically choose the insurance carrier . .). 15 9. Section 2607(a) of RESPA prohibits lenders from accepting kickbacks or referral fees 16 from any person providing a real estate settlement service, including providers of private mortgage 17 insurance. Thus, a lender cannot legally accept a referral fee from the insurer issuing the private 18 mortgage insurance policy on the borrower’s home. Similarly, Section 2607(a) of RESPA prohibits 19 providers of private mortgage insurance from giving kickbacks or referrals fees to providers of real 20 estate settlement services, including lenders and their affiliates. Accordingly, it is unlawful for 21 providers of private mortgage insurance to pay referral fees to lenders and their affiliates. 22 10. Section 2607(b) of RESPA prohibits lenders from accepting any portion of a settlement 23 service fee—including amounts paid by borrowers for private mortgage insurance—from any person 24 providing a real estate settlement service, including providers of private mortgage insurance, other 25 than for services actually performed. Thus, a lender cannot legally accept an unearned fee split from 26 the insurer issuing the private mortgage insurance policy on the borrower’s home. Similarly, Section 27 2607(b) of RESPA prohibits providers of private mortgage insurance from giving any portion of a 28 settlement service fee—including amounts paid by borrowers for private mortgage insurance—to 3 Case 1:12-cv-00375-LJO-SKO Document 1 Filed 03/12/12 Page 5 of 50 1 providers of real estate settlement services, including lenders and their affiliates, other than for 2 services actually performed. Accordingly, it is unlawful for providers of private mortgage insurance 3 to pay unearned fee splits to lenders and their affiliates. 4 11. Defendants have engaged in a single, coordinated scheme designed to circumvent 5 RESPA’s prohibition against kickbacks, referral payments and unearned fee splits. Pursuant to the 6 scheme, each Private Mortgage Insurer pays a portion of borrowers’ private mortgage insurance 7 premiums to HSBC RE in the form of purported “reinsurance” premiums. 8 12. While these payments to HSBC RE are purportedly for “reinsurance” services, HSBC 9 RE receives these payments while assuming very little or no actual risk under its contracts with the 10 Private Mortgage Insurers. From the beginning of 2004 through the end of 2008, HSBC RE collected 11 from the Private Mortgage Insurers at least $61 million as its “share” of borrower’s private mortgage 12 insurance premiums. In contrast, HSBC RE’s “share” of paid claims during this time period was 13 zero.3 See Schedule F – Part 3 from the 2004-2008 Annual Statements filed with the National 14 Association of Insurance Commissioners (“NAIC”) by each of the Defendant Private Mortgage 15 Insurers (showing the reinsurance premiums ceded to and the “losses” paid by HSBC RE).