PMIs Hit With Federal Suits By Home Buyers Alleging Fair Credit Violations
by Kenneth R. Harney
In a potentially huge financial challenge to the private mortgage insurance (PMI) industry, a series of federal class action suits by home buyers charges the mortgage underwriters with willful, mass violations of the Fair Credit Reporting Act. The suits, targeting each of the seven major PMI companies, allege that the insurers routinely have ignored the federal statute's requirement that they notify home buyers whenever negative credit file data triggers higher premium rates. The PMIs, who specialize in underwriting loans to moderate-income and first-time home purchasers, are concerned enough about the potential costs of the suits that they are alerting shareholders in their quarterly financial disclosures. "There can be no assurance that the outcome of the litigation will not materially affect the company's financial position or results of operations," said Milwaukee-based Mortgage Insurance Guaranty Corp. (MGIC) in a recent 8-k securities filing. MGIC and the six other insurers categorically reject the allegations in the class actions. Though the Fair Credit Reporting Act generally requires insurance companies to issue "adverse action" notices to consumers whenever credit file data causes them to be charged higher fees or premiums, the PMIs argue that in the mortgage application context, they function as "credit enhancers," working for lender clients, rather than for consumers directly. The fair credit law requires lenders to issue adverse action notices to applicants only when credit file data causes them to be rejected outright for a loan. If a lender quotes a borrower a higher note rate because of negative credit information, the lender need not disclose the cause of the higher pricing if the applicant accepts the offer. Two federal district courts have either rejected the PMIs' argument distinguishing themselves from other insurance companies, or have declined to dismiss industry motions to dismiss the cases. Two of seven district courts have declined to certify class action status for the suits, but the home buyer plaintiffs are proceeding in those cases individually. Maximum penalties in the fair credit statute are $1,000 per violation -- a potentially staggering liability for an industry that uses "risk-based pricing" tied to credit file data on all mortgage borrowers, and insures over 1 million new consumers' loans a year. "We think we have the law on our side," said Terry A. Smiljanich, a partner in the Tampa, FL-based law firm of James, Hoyer, Newcomer and Smiljanich, P.A. The home buyers suing the PMIs were all charged unusually high monthly premiums -- up to $905 -- on loans in the $200,000 to $250,000 range, according to Smiljanich. But none received adverse action notices alerting them to negative -- and possibly incorrect -- data in their credit files. In a defense motion in one of the cases, MGIC explained the industry's view of its fair credit requirements. "Unlike other types of insurance that may be required by lenders," lawyers for the firm wrote, "mortgage insurance exists solely as a credit enhancement in a transaction." In effect, said other industry sources, any adverse action notices to home buyers should come from the lenders who are dealing directly with the loan applicants. In a separate, defensive move by the industry, members of the Mortgage Insurance Companies of America (MICA) recently wrote to the Federal Trade Commission seeking a simplified, one-time disclosure to all mortgage applicants affected by risk-based pricing. Last year's Fair and Accurate Credit Transactions Act directed the FTC and the Federal Reserve Board to develop a standard disclosure format for loan applicants whose rates or fees have been negatively affected by credit report data. "Inasmuch as (PMI) premiums are part of the cost of mortgage credit," the trade group wrote, "it seems logical that a consumer should receive any required risk-based pricing notice covering the interest rate and cost of (PMI) on his or her loan at the same time." The FTC and the Fed have been drafting the risk-based pricing rule for over a year, and last week declined to say when it would be made public for comment. Meanwhile, say lawyers suing the PMI companies, they hope to certify class actions in the near future and go to trial -- or settle the cases -- regardless of what the FTC and the Fed propose. | 
