Out of concern that banks were unfairly profiting from struggling homeowners, state attorneys general are now seeking to restrict the practice. The terms of a proposed mortgage servicing settlement would prohibit servicers from accepting "commissions," "referral fees," or "kickbacks" in relation to the policies, and prevent banks from force-placing policies when voluntary coverage could simply be extended.
Those terms would drastically alter an industry that until recently received little attention from regulators or the public.
"Generally, we have concerns about consumers being compelled to pay substantially overpriced insurance premiums, particularly in cases where consumers are already under financial stress," a spokesman for Iowa State Attorney General Tom Miller wrote in an email to American Banker in March.
"People in default are an easy mark," said Margery Golant, Jeffrey Golant's mother and an attorney who was among the first to draw attention to the widespread use of force-placed insurance in the wake of the housing collapse. "Practically every single person who is in default has one of these, and most of the time [borrowers] don't even tell us about it unless we ask. And I have seen instances where borrowers who were performing were pushed into default by force-placement."
Though QBE maintains regulated and unregulated arms in many jurisdictions, it appears to sell force-placed insurance solely as a surplus-line product in Florida, Texas and perhaps other states.
It is not possible to evaluate how QBE's rates stack up against other insurers in Florida because its surplus-line status means it does not have to disclose such data. Given that servicers regularly receive a percentage commission on the policies, there is little financial incentive for banks to press for low prices or show restraint when issuing policies.
A review of a handful of QBE cases being litigated in Florida supports this view. In a second case involving Wells, documents show the bank imposed retroactive coverage on a borrower of $1,743 a month — more than the borrower's monthly principal and interest payment. Annualized, the premiums amounted to more than a quarter of the borrower's outstanding mortgage principal, a lawsuit filed by Jeffrey Golant, the Miami law firm Kozyak Tropin & Throckmorton and two other plaintiffs law firms alleges.
"We are confident that all of our vendors are operating in accord with applicable laws in each state," a spokeswoman for Wells told American Banker. The company said it buys force-placed policies from QBE only on the minority of loans it has purchased from correspondents, meaning that only borrowers whose mortgages were originated by other lenders can be force-placed with a carrier whose rates are not regulated. For the rest of Wells' portfolio, it partners with Assurant Specialty Property, which is subject to rate limits in all states.
In other instances, banks partnering with QBE have forced borrowers to pay for insurance in excess of their property's value. In one example, insurance notices show QBE forced a SunTrust Mortgage Inc. borrower to buy a $230,000 insurance policy — on a house that the Broward County, Fla., property appraiser lists as worth less than $82,000. Should the borrower eventually fail to pay QBE the $10,000 annual premium, the government will, in the form of losses to Fannie Mae, which guarantees the mortgage.
Margery Golant said the QBE insurance wasn't the first force-placed policy levied on the home in the above example, just the most expensive.
"She had force-placed coverage prior to QBE," Margery Golant said of the borrower. "But QBE was the most outrageous by a mile."