“Deceptive practices” and lender force-placed insurance: New York’s state of mind (Part 2)

November 3, 2014

Insurance LawIn the first installment I explored the statutory framework; today I will examine Courts have applied these Deceptive Practices Acts provisions to lender force-placed insurance cases in New York.

A U.S. District Court has held that two theories of liability in an LFPI case both stated claims sufficient under the NYDPA to survive a motion to dismiss.  The plaintiffs’ NYDPA claims in that case were based on allegations of “excessive flood coverage” and of “kickbacks”.

The defendants facing those allegations included a lender and a mortgage servicer.  The plaintiffs alleged that the defendants were responsible for placing “excessive flood coverage” under “ambiguous” mortgage contract language, and that the alleged “kickbacks” were not authorized or disclosed to the plaintiffs:

Thus, the conduct alleged by Plaintiffs is likely to mislead a reasonable consumer as to the amounts of flood insurance coverage required, as well as the appropriateness of the HSBC Defendants’ process of selecting and exchanging financial benefits with a force-placed insurance provider.

Hoover v. HSBC Mortgage Corp., 9 F. Supp. 3d 223, 254 (N.D.N.Y. 2014).

Mortgage loan modification procedures were challenged by the LFPI claims alleged in another U.S. District Court case in New York.  The plaintiffs in that case successfully sketched a roadmap for others to follow in LFPI claims arising anywhere, based on “systematic procedures” especially in loan mods.

The plaintiffs in that case alleged in a class-action complaint that “‘a loan modification process … was riddled with flaws'”.  They further and more specifically alleged that the defendants “‘systematically’ assessed fees and increased borrowers’ principal balances”.  The result was that the Court set a new measure of the consumer-oriented prong of the NYDPA.

The Court held in that case that allegations of systematic deception arising from mortgage loan practices “are not confined to a one-off, private contractual dispute.”  Dumont and others v. Litton Loan Servicing, LP, and others, 2014 WL 815244 *10 (S.D.N.Y. March 3, 2014).  [Emphasis added.]

Allegations of systematic lender force-placed insurance practices stated a claim upon which relief can be granted in the Federal Courts under the NYDPA:

The TAC [“Third Amended Class Action Complaint”] indicates that Williams was charged improper fees and that the principal balance of her loan was unilaterally increased.  TAC ¶¶ 127, 130, 134, 138, 142.  It further alleges that she made unnecessary payments as a result …, and that the erroneous charges led to improper notices of default and to a false report to the credit agencies, with the end result being that she was denied a personal loan.  Id.  ¶¶ 139-40, 146, 152, 154.  If these improper charges and incorrect account statements were indeed the product of “systematically” flawed practices, then Williams does have at least a plausible claim that she was materially misled throughout the loan modification process and suffered injuries as a result.

Dumont and others v. Litton Loan Servicing, LP, and others, 2014 WL 8154244 *11 (S.D.N.Y. March 3, 2014).

Beyond mere allegations of systematic, predatory lender force-placed insurance practices, discovery premised on similar allegations can result in denial of motions for summary judgment in LFPI cases, at least in the absence of legally sufficient proof to negate them.  See Dolan v. Fairbanks Capital Corp., 930 F. Supp. 2d 396, 418-20 (E.D.N.Y. 2013).

In sum, LFPI case law decided under the New York Deceptive Practices Act addresses the question of whether allegations of lender force-placed insurance practices of kickbacks and commissions, even of systematic mortgage loan practices, state actionable claims of injury to the public at large.  Cases decided under the New York Act hold that they do.