Illinois v. AAMBG Reinsurance, Inc., No. 16 C 7477, 2017 U.S. Dist. LEXIS 84231 (N.D. Ill. Jun. 1, 2017).

An Illinois federal court dismissed claims by an insurer under state rehabilitation against a captive reinsurer and originating bank concerning private mortgage insurance (PMI). The claims alleged that: (1) the bank's failure to disclose benefits received from the agreement constituted a breach of contract by the reinsurer; (2) the reinsurer and bank breached their duty of good faith and fair dealing by only referring high-risk borrowers to the insurer; and (3) kickbacks were paid in violation of the Real Estate Settlement Procedures Act, 12 U.S.C. 2601 et seq. (RESPA).

The court considered the first two claims to be "implausible" based upon the pleadings. The insurer alleged that the reinsurer and bank failed to satisfy their contractual obligation to disclose to each borrower, as required by HUD, any premiums, kickbacks and other benefits that they were receiving. The complaint did not allege further details such as specific borrowers involved, specific regulatory violations and specific damages to the insurer, and, as a result, the court deemed it "conclusory."

The allegations that the reinsurer and bank only referred high-risk borrowers to the insurer were dismissed as "totally implausible," on the basis that: (1) even if this occurred, the reinsurer would bear most of the net loss under the risk sharing provisions in the reinsurance policy; (2) the insurer did not allege what the bank and reinsurer did with lower-risk borrowers; and (3) the insurer did not explain why it only accepted high-risk borrowers for PMI.

The insurer's RESPA claims stated, in essence, that premiums received by the reinsurer constituted illegal kickbacks under Sections 8(a) and 8(b) of RESPA. The reinsurer argued that these premiums constituted bona fide payments subject to the safe harbor under Section 8(c) of RESPA, as interpreted by HUD public guidance, and the insurer failed to rebut this argument. In addition, the court found that the three-year RESPA statute of limitations ran from the time the primary insurance was initially obtained, not from the time of the most recent distribution from the insurer's trust account, thus timebarring the claim.