In the case of Gorsuch v. Financial Freedom, 2014 WL 4675453 (N.D. Ohio September 18, 2014), a U.S. District Court held that a paragraph in a Federal Housing Administration ("FHA")-insured mortgage provided unlimited authority to a mortgage lender to force flood insurance coverage in any amounts the lender required.
The borrower in this case sued her lender on "an FHA-insured reverse mortgage" after the lender increased her flood insurance coverage requirements. The lender allegedly received "a 'kickback' from the flood insurance provider." Gorsuch v. Financial Freedom, 2014 WL 4675453 *1 (N.D. Ohio September 18, 2014).
The borrower alleged three claims as a result of these events: Violation of the Truth-in-Lending Act, breach of contract, and unjust enrichment. The lender filed a motion to dismiss all claims.
The District Court's ruling on the plaintiff's Truth-in-Lending Act claim, somewhat like its other rulings in this case, was relatively brief although this ruling was a bit longer than the two other rulings the Court made in this case. The Court held that the Truth-in-Lending Act would not support relief in this lender force-placed insurance case involving forced flood insurance in allegedly excessive amounts of coverage. This ruling alone puts this decision in conflict with other decisions on the same issue. The Court in this case did not note the existence of the conflict, however.
Of much greater significance, the Court in this case held that there could be no breach of contract, and so no breach of the accompanying implied duty of good faith and fair dealing under Ohio law, because the following standard paragraph in the plaintiff's uniform mortgage instrument guaranteed free rein to her mortgage lender to force flood insurance in any amount that her lender might require her to pay for:
3. Fire, Flood, and Other Hazard Insurance. Borrower shall insure all improvements on the Property, whether now in existence or subsequently erected, against any hazards, casualties, and contingencies, including fire. This insurance shall be maintained in the amounts, to the extent and for the periods required by Lender or the Secretary of Housing and Urban Development (“Secretary”). Borrower shall also insure all improvements on the Property, whether now in existence or subsequently erected, against loss by floods to the extent required by the Secretary ...
Gorsuch v. Financial Freedom, 2014 WL 4675453 *1 (N.D. Ohio September 18, 2014). [Boldface in original.]
Here is the entire holding in this case on the issue of whether the above-quoted Paragraph 3 gives mortgage lenders freedom to force flood insurance in any amount they choose:
Gorsuch's dismissed claims fail because, as a matter of law, Paragraph 3 authorizes Defendants to demand flood insurance coverage equal to replacement cost value.
Gorsuch v. Financial Freedom, 2014 WL 4675453 *5 (N.D. Ohio September 18, 2014). Ms. Gorsuch's unjust enrichment claim alone survived the lender's motion to dismiss in this Court's opinion:
However, her unjust enrichment claim survives, to the extent it alleges “[t]he kickbacks, commissions, and other compensation that Financial Freedom received in connection with force-placed insurance were not legitimately earned” (¶ 167). Gorsuch fails to adequately allege that the terms of her mortgage bar Defendants from either (1) demanding flood insurance coverage equal to replacement cost value, or (2) force-placing insurance in that amount when she failed to obtain proper flood insurance coverage. But she has plausibly alleged that Defendants participated in an illegal kickback scheme, designed to enrich Defendants and SSIS at Gorsuch's expense by charging inflated, noncompetitive insurance premiums for force-placed insurance (¶¶ 68–71, 85, 92). Ohio law supports an unjust enrichment claim based on those actions, despite the existence of the mortgage contract.
Gorsuch v. Financial Freedom, 2014 WL 4675453 *4 (N.D. Ohio September 18, 2014).
In sum, this ruling would leave mortgage lenders free under FHA-insured uniform mortgage instruments to force homeowners to pay for flood insurance in any amount those lenders may require; but if the lenders take a kickback from the insurance company in exchange for forcing the flood insurance, borrowers can sue because apparently the Court did not interpret the uniform mortgage instrument to authorize kickbacks, in any amount the lender might require.
Dennis Wall is the author of the forthcoming book, "Lender Force-Placed Insurance," scheduled for publication by the American Bar Association in Spring, 2015.
Please Read The Disclaimer. © 2014 by Dennis J. Wall. All rights reserved. No claim to Original U.S. Government Works.
Postscript on Wednesday, October 29, 2014: Thanks to Mr. Dan Luby of Precision Advisors, LLC in Orlando for sharing the results of his eagle-eyed reading of this article!