‘An Undeserved Windfall’: CitiMortgage Hit with Class Action Over Alleged Foreclosure-Hazard Insurance Practices

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CitiMortgage has unjustly enriched itself by charging individuals who’ve redeemed their homes after foreclosure sales for a full year of hazard insurance, even if only a small fraction of the insurance is used, a proposed class action alleges. 

Echoing cases filed recently against Wells Fargo and Bank of America over similar allegations, the 17-page lawsuit claims CitiMortgage has for years, in violation of Kansas state law, made money from and misled “persons who are at their most financially vulnerable—homeowners who just lost their homes in foreclosure proceedings and are trying to struggle back and recover their homes.” 

In Kansas, homeowners who are foreclosed upon and lose their homes at foreclosure sales have the statutory right to redeem their properties, or effectively buy back their residences from a purchaser, usually a lending bank, within a particular time period, the lawsuit begins. According to the case, foreclosure redemptions in Kansas occur either within three or 12 months of the foreclosure sale, depending on the percent of the original loan balance that remains outstanding. The redemption period in Kansas is three months if the borrower has paid less than one-third of the original mortgage balance and 12 months if more than one-third of the balance has been cleared, the suit says.

To redeem their property, a homeowner must pay a sum equal to the sales price the property brought at the foreclosure sale plus certain costs incurred “[d]uring the period allowed for redemption” by the purchaser, including, according to the case, “taxes on the lands sold, insurance premiums on the improvements thereon, [and] other sums necessary to prevent waste.” 

One such reimbursable expense is hazard insurance, the lawsuit states. According to the complaint, when CitiMortgage, as a foreclosing bank, is the successful bidder at a foreclosure sale, the company sometimes buys hazard insurance to protect the property it’s just bought. The defendant typically buys hazard insurance coverage for a full year even though such insurance can be bought for shorter periods of time, per the suit. 

At issue is the claim that CitiMortgage, in Kansas redemptions involving the purchase of hazard insurance, has the opportunity to prorate the insurance amount. Despite the fact that “virtually all expenses” in a common real estate closing, including redemption closings, are prorated, the defendant has nevertheless “willfully and intentionally” chosen not to prorate homeowners’ hazard insurance coverage, the complaint claims. Relatedly, CitiMortgage and its counsel also fail to affirmatively disclose that redemption payoff amounts reflect the purchase of hazard insurance for a full year, the suit alleges. 

“Therefore, in redemptions in which CitiMortgage has purchased a full year of insurance, the redeeming homeowner is required to pay that entire cost as part of the redemption,” the lawsuit summarizes. 

The kicker, the case continues, is that CitiMortgage, following a redemption, is most likely to be reimbursed by the insurance company for the portion of the hazard coverage that went unused. For redemptions that happen with the three-month window permitted, roughly 75 percent or more of the purchased hazard insurance is not used, the suit states, yet CitiMortgage “does not return the reimbursed funds” to redeeming homeowners or their assignees, the lawsuit alleges.

“Rather, it keeps the funds as an undeserved windfall even though the proceeds are unearned and rightfully belong to the homeowners,” the case scathes, emphasizing that the amounts of money in question may reach from “just under $1,000 to many thousands of dollars.” 

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