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From Banking and Finance Law Daily, February 22, 2016

Homebuyers should have investigated kickback claims sooner—equitable tolling denied

By Richard A. Roth, J.D.

A mortgage lender’s closing disclosures that an affiliate might reinsure mortgage insurance policies prevented homebuyers from claiming that the lender fraudulently concealed its potential Real Estate Settlement Procedures Act violations, the U.S. Court of Appeals for the Third Circuit has determined. Since the homebuyers knew about the possible use of the affiliate when their loans closed, they should have looked into whether the arrangement violated the RESPA ban on kickbacks. They could not rely on the doctrine of equitable tolling to extend RESPA’s one-year statute of limitations (Cunningham v. M&T Bank Corp., Feb. 19, 2016, Ambro, T.).

The claim in the proposed class action was that the homebuyers were required to pay for private mortgage insurance because they were financing more than 80 percent of their home purchases. Their lender, M&T Bank, referred them to insurance companies that obtained reinsurance from M&T Mortgage Reinsurance Company. The homebuyers alleged that the reinsurance affiliate accepted payment from the insurance companies without taking on any risk and that this constituted a kickback that was prohibited by RESPA.

Time limit. According to the court, the homebuyers became involved in the suit when, after receiving letters from attorneys, they agreed to serve as named plaintiffs in the class action. However, the 2012 suit was filed four years after the last of their loan closings. RESPA requires suits to be filed no later than one year after a violation.

There wasn’t any question that the one-year statute of limitations had been exceeded. The homebuyers, however, asserted that the statute of limitations should be equitably tolled because M&T had fraudulently concealed the claim.

To establish fraudulent concealment, the homebuyers had to show three elements:

  • that M&T actively misled them;
  • that M&T’s deception prevented them from recognizing their claim before the one-year time limit expired; and
  • that they exercised reasonable due diligence in uncovering the facts that would have revealed their claim.

All three had to be demonstrated, the court made clear.

Due diligence. The court decided that the disclosures given to the homebuyers at their closings prevented them from arguing that M&T had misled them. Each of the homebuyers was given a written disclosure saying explicitly that M&T or an affiliate might agree to reinsure the private mortgage insurance policy and might receive part of the homeowner’s premium as compensation for the resulting risk. The disclosure even offered the homebuyers an opportunity to opt out of the reinsurance arrangement simply by checking a box.

The homebuyers all acknowledged the disclosure in writing, and none of them checked the opt-out box. After their loan closings, none of them did anything to investigate the possibility of a RESPA violation until, after the statute of limitations had expired, they were contacted by attorneys who were looking into a possible class action.

The plain language of the disclosure revealed the possibility of a RESPA violation, the court pointed out, yet the homebuyers did nothing to investigate. “This inaction was not reasonable diligence,” the court said.

Since the homebuyers were required to show all three elements of fraudulent concealment in order to benefit from equitable tolling, the court added, their failure to establish their own due diligence made an examination of the other two elements unnecessary.

The case is No. 15-1412.

Attorneys: Edward W. Ciolko (Kessler Topaz Meltzer & Check) for Judith Cunningham, Frederick D. Deimler III, and Carol Vanover. David J. Bird and Andrew J. Soven (Reed Smith) for M&T Bank, M&T Bank Corp., M&T Mortgage Reinsurance Company, Inc.

Companies: M&T Bank; M&T Bank Corp.; M&T Mortgage Reinsurance Company, Inc.

MainStory: TopStory DelawareNews Mortgages NewJerseyNews PennsylvaniaNews RESPA VirginIslandsNews

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