A massive class action relating to collateral protection insurance has been initiated against a number of banks in Alabama and Tennessee, and other banks may face similar suits.
The suit, filed last month in the circuit court of Greene County, Ala., alleges that at least 17 banks, finance companies, insurance agents, and other entities willfully swindled customers on their mobile home insurance.
"The accounts were overcharged, their payments were wrongfully increased, their account balance claimed was excessive, and the plaintiffs ... suffered wrongful repossession and inappropriate credit reporting," the suit said.
The suit was the latest in a long line of such cases involving collateral protection insurance, or forced placing, as practiced by banks. Earlier this year, Trustmark National Bank of Jackson, Miss. was socked with a $38 million judgment in a similar case involving auto insurance. That decision is under appeal.
The most recent case seeks punitive damages of $200 million from each defendant, as well as compensation for the allegedly excessive charges. The suit dates back to actions beginning in January 1983.
Though only five plaintiffs were listed in the class action, their lawyers suspect that the list will eventually expand to "tens of thousands." As for the defendants, their numbers could also dramatically increase as the lawyers proceed with their investigation.
One of the largest financial institutions named in the suit is Leader Financial Corp. of Memphis, with $2.5 billion in assets the biggest thrift company in Tennessee. Ronald W. Stimpson, the company's president, could not be reached for comment.
The suit said that the finance companies and banks lent money to customers to purchase mobile homes. Those companies then obtained collateral insurance for the new mobile home owners. Such insurance is usually included in the financing package.
The plaintiffs claimed that the price of the "force-placed" insurance obtained by the banks far exceeded the going market prices for collateral insurance. The higher premiums the customers had to pay resulted in "hidden and undisclosed benefits to the financial institutions," the suit said.
The banks and finance companies also kicked back high commissions to the insurance agents, some of whom were not licensed as such, the suit continued.
The amounts insured far exceeded the value of the collateral itself or, in some instances, the total amount of the original loan for the mobile home, the plaintiffs alleged. The finance companies took high commissions, which exceeded the maximum allowed by state and federal law, from the inflated policies, the suit charged. Finally, the mobile homes were repossessed in several instances because the customers could no longer afford the premium payments.
The crux of these cases is the lack of proper disclosure by the bank, lawyers said. The deregulation bills under consideration in Congress stem in part from the multitude of such cases, said William J. Sweet Jr. of Skadden, Arps, Slate, Meagher & Flom.
"Disclosure has been used as the lever to bring litigation," Mr. Sweet said. "That's what some of these bills are aimed at, to make Truth-in- Lending more flexible."
The Greene County case probably won't go to trial for another year because so many parties are involved and other entities are likely to be named, said Albert G. Lewis 3d, a lawyer for the plaintiffs.
The defendants had the case moved to federal court shortly after it was filed in early June, but the plaintiffs have just requested that the case be moved back to the circuit court in Greene County. A ruling on the location is expected within the week, Mr. Lewis said.