Banks Face Thicket of Force-Placed Threats
New York Financial Services Superintendent Benjamin Lawsky cites "perverse incentives" in opening remarks for three-days of hearings the state regulator has scheduled to look into the operations of the force-placed insurance market.May 17
Force-placed insurance has been taking flak from regulators, plaintiff attorneys and consumer groups. Here's how the head of the American Bankers Association's insurance unit sums up the controversy and explains the business.April 11
The insurance regulator in the nation's largest state says underwriters are paying an insufficient amount in claims, suggests commissions paid to banks are part of the problem.March 14
Fannie Mae intends to acquire coverage for uninsured borrowers through a carrier of its choosing, it announced on Tuesday. The move would "significantly reduce costs to homeowners, taxpayers, and Fannie Mae," the GSE says, but harm a profitable business for mortgage servicers.March 6
A federal judge has granted approval for a Florida force-placed insurance class action to proceed against Wells Fargo and QBE Insurance. Evidence already uncovered in the case poses added peril to the defendants and other banks.February 22
Borrower advocates say that the banks' use of unregulated carriers exposes homeowners and mortgage investors to higher costs and greater risk in the event of a catastrophe.April 11
A New York probe has brought national attention to banks' alleged self-dealing in the sale of force-placed insurance. But the investigation is just one of many looming challenges to the practice.
A coalition of state attorneys general is targeting force-placed insurance as part of a broader prospective mortgage-servicing settlement. Separately, proliferating class-action suits are churning out awkward-to-explain details of banks' business practices. And a Housing and Urban Development enforcement attorney who looked into alleged kickbacks paid to banks by insurers has landed at the newly empowered Consumer Financial Protection Bureau.
"People are talking about force-placed, people are litigating it. It's become a topic," says Jeff Golant, a Southern Florida solo practitioner who began filing force-placed insurance suits in 2008. At the time, he and his mother, fellow attorney Margery Golant, were the only Florida lawyers pursuing such cases. He's since been drafted into a four-firm class action effort that includes 10 lawyers and extensive support staff.
Challenges to force placed insurance, in which banks buy insurance on behalf of uninsured borrowers and then tack the cost onto their mortgage debts, were virtually nonexistent two years ago. But allegations of kickbacks and a climate of distrust for mortgage servicers have already produced significant heat. American Banker first wrote about the subject in a 2010 story, "Ties to Insurers Could Land Mortgage Servicers in More Trouble."
How much money is at stake is unclear, though banks' cut of force-placed premiums are almost certainly worth hundreds of millions of dollars. Specialty property insurance division of Assurant Inc, one of the biggest purveyors of the product, reports around $2 billion in revenue a year.
While banks may eventually beat back the attacks on force-placed insurance, the issue increasingly looks like the venue for a significant legal fight. Government investigations are currently the most direct threat, given their expansive ability to demand records and the potential of regulatory remedies. A prospective national mortgage-servicing settlement made public last year sought to limit banks' ability to collect commissions on force-placed policies, and the offices of two state attorneys general involved in the ongoing settlement talks say force-placed insurance is still on the table.
There is also a possibility for the new Consumer Financial Protection Bureau to wade into force-placed insurance. Last summer, the Department of Housing and Urban Development transferred its authority to enforce the Real Estate Settlement and Procedures Act to the CFPB, along with much of its enforcement staff. Among those who jumped to the new agency was Anthony Romano, an attorney who in his former job had contacted Jeff Golant about a possible force-placed insurance investigation.
Neither Romano nor the CFPB responded to a request for comment regarding whether the agency might be looking at force-placed products. But Edward Mills, a Washington policy analyst for FBR Capital Markets, says force-placed is an obvious candidate for a bureau investigation. Such a review could be undertaken quickly in coordination with state enforcement officials, potentially allowing the fledgling agency to produce quick results.
"The bureau is going to be looking at things they can do which will benefit the average American, and obviously one of the concerns in DC is the practices of servicers during the foreclosure process," he says. "In many ways it's just a natural progression."
While private litigation is generally a slower process than government reviews, class action attorneys have had a head start. Minneapolis-based Nichols Kaster filed the first against JPMorgan Chase & Co. in early 2010, alleging that the company had forced home-equity borrowers to obtain excessive amounts of flood insurance.
Golant's team followed up with a case against Wells Fargo in April of 2011, and other firms have entered the fray since. At least 10 force-placed cases are now in progress against Bank of America, Wells Fargo & Co, JPMorgan Chase & Co, RBS Citizens Bancorp, and U.S. Bancorp.
The suits are generally in their early stages. But the only one to have advanced past class certification, Hofstetter v. Chase Home Finance LLC, suggests serious trouble for banks.
In depositions made public following the defense's failure to properly request confidentiality from the court, Chase employees described a system in which Chase collects hefty commissions on force-placed insurance — yet does no work in relation to the policies.
"What function does Chase Insurance Agency, Inc. perform with respect to flood insurance?" the plaintiffs' attorney asked in a deposition.
"I would say no function," Chase's employee responded.
Things didn't improve from there. According to the depositions, Chase gives force-placed insurer Assurant Inc. full control over underwriting, customer service, and even the production of letters on Chase letterhead.
One Chase employee testified that, despite Chase Insurance Agency Inc.'s name, the division employs absolutely no insurance agents. That could potentially raise legal concerns, in that RESPA and some state laws restrict both unearned fees and referral payments to unlicensed insurance agents.
"[Chase] does not monitor or track flood insurance coverage, does not issue flood insurance coverage, and does not obtain flood insurance coverage," plaintiffs' attorneys stated in a class certification brief.
Chase declined to speak about the case. In a statement to American Banker, Assurant said that it was not directly involved in the Hofstetter case and couldn't comment on either the litigation or the New York investigation.
"But we stand ready to work with our clients and the Department of Financial Services, to meet the terms and conditions for lender-placed insurance as required by the state," the company added.
Chase settled the Hofstetter case for a little more than $10 million in cash and promises to limit the size of policies and stop collecting commissions on force placed flood insurance. While the case's price tag was small for such a big bank, the sum accounts for the overwhelming majority of the alleged damages suffered by home equity borrowers forced to buy flood coverage, and it includes a disgorgement of profits.
Such terms suggest that Chase was eager to avoid a trial that would broadly air the case - as does the final settlement's stipulation that "the parties and their counsel agree that they will not issue any press releases."
Kai Richter, the Nichols Kaster attorney who handled the Hofstetter case, declined to speak directly about the Chase settlement. But he says that the general allegations and evidence in the cases he's brought all involve similar business practices by the country's largest banks.
"Based on our investigations and the clients we represent, I think it's fair to say this is an industry-wide problem," says Richter. "In a number of cases we've had borrowers who originated their loans with smaller, local banks, and they only started having problems when one of the huge banks came along and scooped up the loan."
The firm's other legal challenges are progressing — "we've had pretty good success in beating back motions to dismiss," Richter says. "And in Golant's case against Wells Fargo, a motion for class certification is expected in the coming weeks."
While the largest banks are gearing up to fight such efforts, some servicers have proven more willing to discuss voluntary modifications to their force-placed insurance operations. At the request of New York's Department of Financial Services, American Home Mortgage Servicing Inc., Ocwen Financial and Vericrest Financial have all agreed to a set of servicing best practices that seek to limit the use of force-placed insurance and prohibit self-dealing.
"AHMSI is making good progress on the implementation plan," a spokeswoman for the company says. "We believe that the best practices will serve as a guide of servicing standards nationwide that are in the best interest of homeowners and investors."