The opinion of the court was delivered by: Barbara A. McAuliffe United States Magistrate Judge
FINDINGS & RECOMMENDATIONS ON PLAINTIFFS' MOTION FOR CLASS CERTIFICATION
In this action for violations of the Real Estate Settlement Procedures Act ("RESPA"), Plaintiffs move for class certification of all homeowners who obtained residential mortgage loans through PHH Corporation ("PHH")*fn1 , and PHH's affiliated reinsurer, Atrium Insurance Corporation ("Atrium") (PHH and Atrium are collectively referred to as the "Defendants"). The matter was briefed extensively (Doc. 117, 129, 138, 160, 162, 185, 202, 208, 211), and a hearing was held on May 3, 2013. (Doc. 226.) Counsel Alan Plutzik, Jay Whitman and Terrance Ziegler appeared in person for Plaintiffs. Counsel David Souders and Joseph Genshiea appeared in person for Defendants. Having carefully considered the parties' submissions and the entire record in this case, the Court recommends Plaintiffs' Motion for Class Certification be GRANTED IN PART AND DENIED IN PART.
A. Captive Reinsurance Arrangements
This case concerns the relationship between consumers of private mortgage loans, lenders, private mortgage insurers, and lender-affiliated reinsurers. Individuals who purchase a home with less than a 20% down payment must generally purchase private mortgage insurance to protect the lender against the risk of default. Pl.s' First Amended Complaint "FAC," ¶ 3, Doc. 96. Borrowers in this situation pay an insurance premium in addition to their monthly mortgage payment, with all payments being collected by the lender, who later tenders insurance premiums to the insurer. FAC
¶ 28. Private mortgage insurers typically are unaffiliated with the lender, and provide risk coverage for a percentage of the loan in the event of default. FAC ¶ 26. Typically, the lender, rather then the borrower, chooses the private mortgage insurance provider. FAC ¶ 29.
Private mortgage insurers may reduce their exposure on the loans they insure by transferring part of the risk to a reinsurer. FAC ¶ 42. A reinsurer assumes a portion of the risk on a given pool of loans in exchange for a percentage of the private mortgage insurer's premiums (this is commonly referred to as a "premium cede"). FAC ¶ 42. Certain lenders, seeking to capitalize on the billions of dollars borrowers pay to private mortgage insurers in premiums each year, have established their own affiliated or "captive" reinsurers. FAC ¶ 47. These captive reinsurers provide reinsurance primarily or exclusively for loans originated by the lender that require the borrower to pay for private mortgage insurance. FAC ¶ 47. Under "captive reinsurance arrangements," the lender refers its borrowers to a private mortgage insurer who agrees to reinsure with the lender's captive reinsurer. FAC ¶ 48. These arrangements require the private mortgage insurer to cede a percentage of the borrowers' premiums to the lender's captive reinsurer. FAC ¶ 48.
B. Defendants' Captive Reinsurance Arrangement
PHH originates and services residential mortgage loans. Plaintiffs are individuals who obtained mortgages from PHH and provided down payments of less than 20% of the total purchase price of their homes. FAC ¶¶ 10-15. Each of the named Plaintiffs have a residential mortgage loan with PHH that is insured by one of the following private mortgage insurers (the "Primary Insurers"):
(1) CMG Mortgage Insurance Company ("CMG"); (2) Genworth Mortgage Insurance Company ("Genworth"); (3) Radian Guaranty Inc. ("Radian"); and (4) AIG United Guaranty Mortgage Insurance Company ("UGI"). FAC ¶¶ 10-15, 61.
Defendant Atrium, a wholly-owned subsidiary of PHH, is a captive reinsurer. Atrium reinsured the Primary Insurers' obligations on PHH's loans to Plaintiffs. FAC ¶ 61. All of Atrium's reinsurance agreements with the Primary Insurers were "excess-of-loss" agreements. Def.s' Opp. to Class Cert., 10: 3-9, Doc. 129. An excess-of-loss agreement calls for the reinsurer to provide reinsurance on annual pools of loans. These annual pools of loans are commonly referred to as "books." A reinsurer such as Atrium will pay on reinsurance obligations once losses exceed a certain percentage of losses (the "attachment point"), and only up to a certain percentage of losses (the "detachment point"). Id. In insurance parlayance, this is commonly referred to as a specified corridor or "band" of loss.*fn2 Pl.s' Mot. For Class Cert., 11: 26-27, Doc. 117. Atrium's bands of loss with the four Primary Insurers varied, and sometimes varied for different book years. Doc. 129, 10: 9-10.
For each of Atrium's reinsurance agreements with the four Primary Insurers, the premium cedes for all book years were pooled into one trust account. Doc. 117, 11: 5-14. Reinsurance obligations are satisfied from all the funds in a given trust, not merely from those ceded premiums on a given book year. Id. This pooling of premium cedes to cover obligations across book years is referred to as cross-collateralization. Pl.s' Reply, 19: 1-8, Doc. 138.
C. Plaintiffs' Allegations
Plaintiffs filed this putative class action on June 2, 2008. (Doc. 2.) Plaintiffs allege Defendants PHH and Atrium have acted together to violate Sections 8(a) and (b) of RESPA by entering into captive reinsurance arrangements for the purpose of receiving kickbacks, referral payments and unearned fee splits.
Plaintiffs allege the insurance premiums ceded to Atrium are, in fact, kickbacks from the Primary Insurers to PHH in exchange for PHH's referral of borrowers to the Primary Insurers for private mortgage insurance. Central to Plaintiffs' allegation that Atrium's premium cedes are provided as a kickback to PHH (rather than payment for Atrium's reinsurance services) is Plaintiffs' argument that Atrium never assumed real reinsurance risk. FAC ¶¶ 6, 53-55, 65, 70. First, Plaintiffs argue that because the reinsurance trusts were funded almost exclusively by ceded premiums, not Atrium's own capital, no real or commensurate risk was transferred. Second, Plaintiffs argue Atrium's reinsurance agreements with the Primary Insurers contained liability-limiting provisions that limited Atrium's potential exposure beyond the bands of loss. Absent the requisite transfer of risk, Plaintiffs argue, the reinsurance arrangements were illusory, and Atrium's acceptance of the ceded premiums from private mortgage insurers constituted an unlawful kickback to PHH in violation of Section 8. Accordingly, as permitted under RESPA, Plaintiffs seek recovery of three times the amount class members paid for PHH's settlement services.
D. Previous Merits Determinations
On October 6, 2008, Defendants moved for judgment on the pleadings. (Doc. 30.) Defendants' motion for judgment on the pleadings advanced two arguments: (1) Reinsurance is not a "settlement service" under RESPA; and (2) Plaintiffs suffered no injury as their monthly insurance premiums were based on rates filed and approved by the applicable state department of insurance (the "filed rate doctrine"). On September 18, 2009, the court denied Defendants' motion for judgment on the pleadings. (Doc. 60.)
First, the Court found that the private mortgage insurance, rather than the reinsurance, was the relevant "settlement service" at issue. Munoz v. PHH Corp., 659 F. Supp. 2d 1094, 1098 (E.D. Cal. 2009) ("Defendants treat the PMI reinsurance as the activity that must be evaluated . . .They have focused the analysis on the wrong step. Plaintiffs allege that PHH received a referral fee for directing PMI business to certain providers. The reinsurance is only the means by which the alleged fee is transferred; the PMI itself is the settlement service at issue. Under the plain terms of the HUD regulation, providing PMI does constitute a settlement service covered by Section 2607 of RESPA"); See also, 12 U.S.C. § 2602(3)(The term "settlement services" includes any service provided in connection with a real estate settlement); 24 C.F.R. 3500.2(b) ("Settlement service means any service provided in connection with a prospective or actual settlement, including, but not limited to, any one or more of the following: ... (10) Provision of services involving mortgage insurance.")
Second, the Court found that the filed rate doctrine did not bar Plaintiffs' claims because Plaintiffs challenged an alleged unfair business practice, rather than the actual insurance premium rates. Munoz, 659 F. Supp. 2d at 1099-1101 ("Fundamentally, Plaintiffs are not challenging the PMI premium rates but an alleged unfair business practice. . . . The balance of case law suggests that the doctrine does not bar a RESPA claim in this case.")
E. Plaintiffs' Motion for Class Certification
On February 11, 2011, Plaintiffs filed this motion for class certification pursuant to Rule 23 of the Federal Rules of Civil Procedure. Plaintiffs seek to represent a class consisting of:
All persons who obtained residential mortgage loans originated and/or acquired by PHH and/or its affiliates on or after January 1, 2004, and, in connection therewith, purchased private mortgage insurance and whose loans were included within PHH's captive mortgage reinsurance arrangements (the "Class").
Pl.'s Mot. For Class Cert., 1: 6-9, Doc. 117. Plaintiffs seek to appoint named Plaintiffs Efrain Munoz, Leona Lovette, Stephanie Melani, Iris Grant, John Hoffman, and Daniel Maga, II, as Class representatives. Plaintiffs also seek to appoint the law firm of Barroway Topaz Kessler Meltzer & Check, LLP as Lead Class Counsel, and the law firms of Bramson, Plutzik, Mahler & Birkhaeuser, LLP, Berke, Berke & Berke and Travis & Calhoun, P.C. as Class Counsel.
Plaintiffs' Motion for Class Certification has been the subject of considerable delay at the request of the parties. The parties have requested no less fifteen modifications to the briefing and/or hearing schedule on Plaintiffs' Motion for Class Certification. Doc. 51, 53, 56, 59, 62, 73, 75, 88, 92, 132, 156, 159, 186, 191, 194. Additionally, this case was stayed for approximately ten months when the United States Supreme Court granted certiorari in First American Financial Corporation v. Edwards, No. 10-708. Doc. 166, 171 (Certiorari was later dismissed as improvidently granted).
A. Background of RESPA and Requirements for a Viable RESPA Claim "Congress first passed RESPA in 1974 to, inter alia, promote competition within the real estate settlement services industry and to eliminate certain business practices that were artificially inflating the cost of settlement services." Minter v. Wells Fargo Bank, N.A., 274 F.R.D. 525, 536 (D. Md. 2011). RESPA proscribes a number of real estate related practices, but at issue here is Section 8, which essentially bans real estate settlement service providers from collecting unearned fees and kickbacks. See, 12 U.S.C. § 2607 (a) & (b). Section 8(a), codified at 12 U.S.C. § 2607, prohibits kickbacks for referrals:
No person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.
Subsection (b) prohibits splitting charges:
No person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed.
These prohibitions are subject to the safe harbor of Rule 8(c), which provides that "[n]othing in this Section shall be construed as prohibiting ... the payment [of] ... compensation ... for services actually performed." 12 U.S.C. § 2607(c). "Any person or persons who violate the prohibitions or limitations of this section shall be jointly and severally liable to the person or persons charged for the settlement service involved in the violation in an amount equal to three times the amount of any charge paid for such settlement service." 12 U.S.C. § 2607(d)(2).
Plaintiffs claim that the reinsurance premiums received by Atrium constitute "fees, kickbacks or things of value" in exchange for PHH's referral of business to the Primary Insurers in violation of Section 8(a). FAC ¶ 91. Plaintiffs also allege that Atrium violated section 8(b) of RESPA by accepting a "portion, split or percentage of charges received by private mortgage insurers for the rendering of real estate settlement services other than for services actually performed[,]" because Atrium does not "actually perform" reinsurance services. Id. ¶ 92. Plaintiffs do not dispute that if Atrium is deemed to provide a bona fide reinsurance service, Defendants' captive reinsurance arrangement is lawful under Section 8. Pl.s' Reply, 23-52, Doc. 138. Indeed, the parties agree the central question in this litigation is whether Atrium actually provides reinsurance services. See, Id.; Def,'s Sup. Opp., 8-11, Doc. 185.
B. The Parties' Positions On the Required Proof for a Section 8 Claim
The parties dispute the types of evidence necessary to determine whether Atrium "actually performed" reinsurance services. Plaintiffs argue Atrium "actually performs" reinsurance services if it meets the criteria outlined in an opinion letter issued by the Department of Housing and Urban Development ("HUD"). Defendants, on the other hand, rely on three federal decisions to suggest that an entity actually performs reinsurance services so long as it either makes some reinsurance payments, or, is under contract to perform reinsurance services.
1. HUD's Opinion Letter On Whether Reinsurance Services Are Actually Performed
HUD is the federal agency previously responsible for enforcing RESPA
and promulgating the implementing rules thereunder.*fn3
HUD can "prescribe such rules and regulations" and "make such
interpretations ... as may be necessary to achieve the purposes of
[the Act]." Id. § 2617(a). HUD has never issued a formal regulation or
policy statement concerning the legal standards for a valid captive
reinsurance agreement. However, on August 6, 1997, HUD issued an
opinion letter to Countrywide Funding Corporation (the "Countrywide
Letter"), which requested clarification on the applicability of
Section 8 to Countrywide's captive reinsurance arrangements. The
Countrywide Letter has been relied upon by mortgage insurers,
lender-owned reinsurers and courts alike to evaluate a captive
reinsurance arrangement's compliance with Section 8. See, e.g., McCarn
v. HSBC USA, Inc., 2012 WL 7018363 (E.D. Cal. 2012) (citing the
Countrywide Letter in evaluating when captive reinsurance arrangements
are permissible under RESPA); Kay v. Wells Fargo & Co.,
247 F.R.D. 572 (N.D. Cal. 2007) (while not directly citing the Countrywide
Letter, both parties, as well as the court, agreed that the
"substantiality of risk transfer" -- a concept discussed in the
Countrywide Letter -- was a "crucial liability issue"); Def.'s Opp.,
17: 17-19, Doc. 129 ("In guidance provided to Countrywide in August
1997, HUD issued a letter that, for lack of other guidance, has been
relied upon by mortgage insurers and lender-owned reinsurers alike to
maintain compliance with RESPA.")
The Countrywide Letter opined that captive reinsurance "arrangements are permissible under Section 8 if the payments to the reinsurer: (1) are for reinsurance services 'actually furnished or for services performed'; [and] (2) are bona fide compensation that does not exceed the value of such services." Doc. 114, Attach. 5 (Emphasis in original). If either one of these requirements are lacking, the captive reinsurance arrangement violates Section 8. Id.
To meet the first prong of the Countrywide Letter (the reinsurance services are actually furnished or performed), three requirements must be satisfied: (1) There must be a legally binding contract for reinsurance with terms and conditions conforming to industry standards; (2) The reinsurer must post capital and reserves satisfying the laws of the state in which it is chartered and the reinsurance contract between the primary insurer and the reinsurer must provide for the establishment of adequate reserves to ensure that, when a claim the reinsurer is made, funds will exist to satisfy the claim*fn4 ; and (3) there must be a real transfer of risk.*fn5 Doc. 114, Attach. 5, p. 6. To meet the second prong of the Countrywide Letter, several factors are considered to determine if the compensation (premium cedes) exceeds the value of the reinsurance services.*fn6 Id. at 7 ("whether the compensation is commensurate with the risk ....")
Plaintiffs argue the Countrywide Letter provides the proper framework to evaluate the legitimacy of Defendants' captive reinsurance arrangement under Section 8. Plaintiffs also argue the Countrywide considerations can be litigated on a classwide basis.
2. Defendants' Position on Section 8 Liability For Captive Reinsurance Arrangements
Defendants, despite a fifty-page opposition to Plaintiffs' Motion for Class Certification, did not initially offer a legal standard to evaluate the legitimacy of its captive reinsurance arrangement under Section 8. Defendants' opposition states that "Plaintiffs assert 'the parties will agree that the central RESPA liability question raised by this litigation concerns the bona fides of Defendants' captive reinsurance arrangements and whether they resulted in a transfer of risk." Def.s' Opp., 16: 12-15, Doc. 129. However, Defendants do not dispute "Plaintiffs assertion."
Defendants state that "the reinsurance arrangements entered into by Atrium were structured in strict adherence to state regulatory requirements [and] met with the requirements outlined by HUD in the so-called 'Countrywide Letter.'" Def.s' Opp., 16: 17-21, Doc. 129. Defendants discuss the Countrywide Letter and acknowledge that it has "been relied upon by mortgage insurers and lender-owned reinsurers alike to maintain compliance with RESPA." Def.s' Opp., 17: 17-19, Doc. 129. Notwithstanding these apparent concessions, Defendants then state "that [the Countrywide Letter] lacks the force of law and is not entitled to deference" because it is an informal opinion letter, rather than a formal resolution issued pursuant to HUD's rulemaking authority. Def.s' Opp., 17, n. 10, Doc. 129. Defendants, however, do not articulate any basis to evaluate captive reinsurance liability under Section 8.
Defendants' supplemental brief presents a more distilled position on Section 8 liability. Defendants now maintain captive reinsurance arrangements invoke Section 8 liability only when the reinsurer "performed no services (i.e., that it assumed no risk)" in exchange for its premium cedes.
Def.s' Sup. Opp., 10: 1-2, Doc. 185. In support of this position, Defendants cite the following cases: Freeman v. Quicken Loans, Inc., -- U.S. -- , 132 S. Ct. 2034, 2038 (2012); Martinez v. Wells Fargo Home Mortg., Inc., 598 F.3d 549 (9th Cir. 2010); and Kay v. Wells Fargo & Co., 247 F.R.D. 572, 576 (N.D. Cal. 2007).
In Freeman, the Supreme Court addressed the scope of Section 8(b); specifically, whether Section 8(b) "prohibits the collection of an unearned charge by a single settlement-service provider-what we might call an undivided unearned fee-or whether it covers only transactions in which a provider shares a part of a settlement-service charge with one or more other persons who did nothing to earn that part." Freeman, 132 S. Ct. at 2039. To determine whether Section 8 covered undivided unearned fees, Freeman analyzed a 2001 HUD policy statement that, among other proclamations, stated Section 8(b) was not limited to situations where at least two persons split or share an unearned fee. Id. Freeman rejected HUD's interpretation because the plain language of Section 8(b) requires a showing that the settlement service charge was divided by two or more persons. Id. at 2044.
In dictum, Freeman also addressed a separate HUD interpretation in this 2001 policy statement that Defendants argue is relevant to Plaintiffs' claims. This separate HUD interpretation opined that overcharges for settlement services could result in Section 8 liability. See, Id. at 2039 ("in addition to facing liability when [the settlement service provider] collects a fee that is entirely unearned, a provider may also "be liable under [Section 8(b)] when it charges a fee that exceeds the reasonable value of goods, facilities, or services provided . . . .") Freeman determined that overcharges for a settlement service could not result in Section 8 liability, and HUD's contrary interpretation of Section 8 was "manifestly inconsistent with the statute HUD purported to construe," Id. at 2039.
In Martinez v. Wells Fargo Home Mortg., Inc., 598 F.3d 549 (9th Cir. 2010), the Ninth Circuit specifically considered the question of whether a settlement service provider who overcharges for settlement services is liable under Section 8. Referring to HUD's 2001 Policy Statement interpreting Section 8(b) as prohibiting overcharges -- "[i]f the payment of a thing of value bears no reasonable relationship to the market value of the goods or services provided, then the excess is not for services or goods actually performed or provided[,]" See RESPA Statement of Policy 2001--1, 66 Fed.Reg. 53,052, 53,057--58 (Oct. 18, 2001) (citing 24 C.F.R. § 3500.14(g)(2) -- Martinez found that "[t]he language of Section 8(b) prohibits only the practice of giving or accepting money where no service whatsoever is performed in exchange for that money . . . By negative implication, Section 8(b) cannot be read to prohibit charging fees, excessive or otherwise, when those fees are for services that were actually performed." Martinez, 598 F.3d at 553-4. Martinez's decision that Section 8(b) does not prohibit overcharges is in line with other federal circuits. See Friedman v. Mkt. St. Mortgage, 520 F.3d 1289, 1291 (11th Cir. 2008) (holding that "subsection 8(b) does not apply to settlement fees that are alleged to be excessive"); Santiago v. GMAC Mortgage Group, Inc., 417 F.3d 384, 385 (3d Cir. 2005) (finding that "RESPA does not provide a cause of action for overcharges"); Krzalic v. Republic Title Co., 314 F.3d 875, 881 (7th Cir. 2002) ("We conclude that section 8(b) clearly and unambiguously does not extend to overcharges."); Freeman, 132 S. Ct. at 2039 (in dictum, noting that HUD's position on Section 8 overcharges was "manifestly inconsistent with the statute HUD purported to construe").
The final case Defendants rely upon is Kay v. Wells Fargo & Co., 247 F.R.D. 572, 576 (N.D. Cal. 2007). In Kay, under facts very similar to those present here, the plaintiffs brought a class action alleging Section 8 violations predicated on a captive reinsurance arrangement. Id. at 574. At the class certification stage, plaintiffs argued that equitable estoppel should toll the statute of limitations for some unnamed class members because the lender/reinsurer "affirmatively represented to the putative class members that any amount it received from its captive reinsurance arrangements was for services actually performed when, in actuality, little or no risk was transferred at all in the transaction." Id. at 578. Rejecting this argument, Kay stated that: it is an indisputable fact in this case that North Star was and remains obligated to operate as the reinsurer for each borrower's private mortgage insurance. That North Star has yet to be called upon to make any payments in no way means that it does not continue to be liable in the event that any of the requisite contingencies occur. North Star continues to provide a service, namely reinsurance. By definition, therefore, North Star has provided and will continue to provide a service. Even if North Star was paid excessively, the fact remains that North Star has and will continue to provide a service, contrary to the conclusory wording of the complaint.
Id. at 577 (despite denying equitable tolling for class members, Kay certified this substantially similar captive reinsurance class action. See, Id. at 578-9). Based on the decision in Kay, Defendants argue they "actually perform" reinsurance services so long as they are contractually ...