The Fourth Circuit has ruled that a private mortgage insurer cannot rely on the arbitration provision in a lending transaction to avoid a Fair Credit Reporting claim.  The case is Brantley v. Republic Mortgage Ins. Co.

The Brantleys bought a house in South Carolina in 2003.  Since they financed 100% of the purchase price, their lender, SouthStar Funding, required them to purchase private mortgage insurance.  Republic supplied that coverage, at a monthly premium of almost $500 a month.  The SouthStar lending documents contained a mandatory arbitration provision, but said nothing about Republic.

Soon thereafter, according to the complaint, Republic raised the Brantleys’ premium, based on their credit report.  The homeowners filed suit under the FCRA; Republic moved to dismiss due to the arbitration clause.  On Wednesday, the appellate court affirms the district court’s refusal to apply the arbitration provision to claims against Republic, since it was not a signatory to the agreement.

Republic had argued that it should be entitled to the benefits of the agreement based on  equitable estoppel and third-part beneficiary theories.  Analyzing the estoppel claim under a doctrine handed down recently by the Eleventh Circuit, and adopted by this panel of the Fourth, the court finds that Republic’s claims are not so intertwined with the relationship between the homeowners and the lender as to make the insurer essentially part of the same transaction.  The court notes that the origin of the claim has nothing to do with the lender’s actions; it is solely a dispute betwen the homeowners and the PMI insurer.  Here, as in many other appeals, the standard of review plays a vital role in the ultimate outcome; the appellate court applies a deferential abuse of discretion standard, instead of the stricter plenary review urged by the lender.

The court also declines to find that Republic is a third-party beneficiary of the agreement betwen the homeowners and the lender.  In doing so, the court points to the fact that Republic is not mentioned anywhere in the agreement.  Since third-party beneficiary claims must arise from the four corners of the document, the court finds no basis to apply the doctrine here.