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From Antitrust Law Daily, April 26, 2013

Homeowners Could Proceed with Bank Holding Company Act, California Unfair Competition Law Claims for Force-Placed Flood Insurance

By Tobias J. Gillett, J.D., LL.M.

Homeowners stated putative class action claims under the federal Bank Holding Company Act (BHCA) and California’s Unfair Competition Law (UCL) against Wells Fargo Bank, N.A. over its practice of force-placing backdated flood insurance policies on the homeowners’ properties, in exchange for unearned commissions from insurers, the federal district court in San Francisco has ruled (Lane v. Wells Fargo Bank, N.A., April 24, 2013, Alsup, W.).

The homeowners had loans on homes in flood hazard areas that were serviced by Wells Fargo. Due to their location, the homeowners were required to maintain flood insurance on their property. If they did not maintain adequate insurance, Wells Fargo could purchase insurance for them and charge the cost back to the homeowners, a process known as "force-placement."

The homeowners brought suit against Wells Fargo, asserting that it had force-placed insurance on their homes through purchase agreements with two insurers under which its subsidiary Wells Fargo Insurance (WFI) received "kickbacks" in the form of unearned commissions. Wells Fargo allegedly sought to maximize these kickbacks by force-placing policies with retroactive effective dates. In the present motion, Wells Fargo moved to dismiss the homeowner’s claims under the BHCA and the UCL.

Backdating. The court first rejected Wells Fargo’s contentions that a number of the homeowners’ claims should be dismissed because federal law required backdating to the date on which coverage lapsed, and because the homeowners’ mortgages permitted backdating. Although the National Flood Insurance Program prohibited a lender from issuing a loan for a property unless flood insurance was in place "for the term of the loan," the statute "did not require backdating force-placed insurance and charging borrowers the increased cost," the court explained. Moreover, guidance from the Comptroller of the Currency "did not square with defendant’s interpretation that the statute requires backdating of insurance."

A January 2013 amendment, providing that loan servicers could charge borrowers for "premiums or fees incurred for coverage beginning on the date on which flood insurance coverage lapsed or did not provide a sufficient coverage amount," was not in effect at the time of Wells Fargo’s backdating. A House Report suggesting that the amendment was meant to clarify existing law was part of a different bill that did not become law. Further, a Consumer Financial Protection Bureau comment permitting force-placement of flood insurance would not be in effect until January 2014.

Therefore, "federal law did not require backdating of insurance during the relevant time frame," in the court’s view. Although Wells Fargo’s actions might comply with provisions in the homeowners’ mortgages, such a contractual analysis was not appropriate on a motion to dismiss. Finally, judicial decisions did not agree on the interpretation of the mortgage language. The court thus denied Well Fargo’s motion to dismiss the backdating theory.

Bank Holding Company Act

The court also declined to dismiss the homeowners’ claims under the BHCA. The court explained that the BHCA prohibits a bank from furnishing a service to a customer on the condition "that the customer shall obtain some additional credit, property, or service from" a "subsidiary of such bank holding company." To demonstrate a violation of this section of the BHCA, "a plaintiff must show that (1) the banking practice in question was unusual in the banking industry, (2) an anti-competitive tying arrangement existed, and (3) the practice benefits the bank."

Tying arrangement. The homeowners contended that Wells Fargo had tied its purchase of flood insurance, as the tying product, to the commission to WFI for unspecified services, as the tied product. The court initially dispensed with Wells Fargo’s argument that force-placing insurance was not a service to the borrower. Although the practice protected Wells Fargo and the equity in the borrower’s home, the insurance also protected the borrower. Therefore, force-placing insurance could be a tying product, in the court’s view. The court also concluded that WFI’s insurance brokerage services could constitute a tied product, even though Wells Fargo claimed WFI never performed a service, because the homeowners plausibly pled "that even a non-existent service for which borrowers must pay may be a tied product under the Act," and the homeowners had alleged that they paid commissions.

Anti-competitive. The court also rejected Wells Fargo’s argument that the homeowners had to allege that the tying arrangement was anti-competitive. The court cited the Ninth Circuit’s 1996 decision in S & N Equip. Co. v. Casa Grande Cotton Fin. Co., 97 F.3d 337, in which the court of appeals concluded that "while our test speaks in terms of an ‘anti-competitive’ tying, the modifier either drops out or is presumed to exist." Moreover, a line in the S & N Equip. Co. decision suggesting replacement of the term "anti-competitive" with the term "unlawful" was "dicta," in the court’s view, and did not require the homeowners to show the tying arrangement was unlawful.

Unusual banking practice. The court initially rejected the homeowners’ contention that they did not have to demonstrate an unusual banking practice because Section 1972(1)(C),which did require a showing of an unusual banking practice, included the word "usually," while Section 1972(1)(B), under which the homeowners were proceeding, did not. The court observed that Section 1972(1)(A) also omitted the word "usually," but did require a showing of an unusual banking practice.

However, the court concluded that the homeowners had sufficiently alleged an unusual banking practices to survive a motion to dismiss. The homeowners alleged that WFI did not purchase the best available insurance policies for the properties, that Fannie Mae prohibited charging borrowers a commission for force-placed insurance, and that Wells Fargo was motivated by the desire to earn profits and not to protect its collateral. These facts were sufficient to allege an unusual banking practice, in the court’s view, and therefore it denied the motion to dismiss the BHCA claim.

Unfair Competition Law. The court then proceeded to address the homeowners’ claims under the UCL. The court explained that the UCL prohibits "unlawful, unfair, or fraudulent" business practices. The homeowners asserted claims under the unlawful and unfair prongs, but Wells Fargo only moved to dismiss the claim under the unlawful prong.

The court first declined to dismiss the claim based on the alleged BHCA violation, because it had previously refused to dismiss the BHCA claim. However, the court did dismiss a claim based on breach of contract. While a breach of contract could support a claim under the "unfair" prong, a common law violation such as breach of contract is insufficient to state a claim under the "unlawful" prong.

The case is No. C 12-04026 WHA.

Attorneys: Angela Mann (Wagoner Law Firm, P.A.) for Danny Lane. Jonah Sampson VanZandt (Severson and Werson) for Wells Fargo Bank, N.A.

Companies: Wells Fargo Bank, N.A.

MainStory: TopStory Antitrust StateUnfairTradePractices CaliforniaNews

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