New York State’s Department of Financial
Services is investigating several large banks to determine whether they
fraudulently steered homeowners into overpriced insurance policies.
The investigation
centers on so-called force-placed insurance that has become increasingly common
since the downturn of the housing market began and homeowners who have had
trouble keeping up with payments on their home insurance. Unless you have been foreclosed
on, most of you have probably never heard of force-placed insurance, or at
least have little understanding of the instrument. Force-placed insurance was a
niche industry before the recession and housing bubble, but it has grown
drastically in the last few years. As homeowners struggle to meet their
mortgage bills, they often lapse on their home insurance payments first.
Mortgage lenders have long required home buyers to buy enough
insurance to cover the lenders’ stake in the property in order to protect their
collateral from fires and other hazards. The contracts routinely allow for the
lender to buy another policy if the homeowner lets his own policy lapse. The
lender either uses money from the mortgage escrow account, or if that isn’t
sufficient, advances the money and gets reimbursed when the house is sold.
JPMorgan Chase, Bank
of America, Citigroup and Wells Fargo are among the major companies
involved in the inquiry by the Department’s office. Benjamin M. Lawsky, the
superintendent of New York State’s Department of Financial Services, is leading
the investigation.
Mr. Lawsky’s office
issued 31 subpoenas or other legal notices related to the case in early October
2011. His office has already turned up instances where mortgage servicing units
at large banks steered distressed homeowners into insurance policies up to 10
times as costly as the homeowners’ original plans. In some cases, those
policies were offered by affiliates of the banks themselves. That introduces a
potential conflict of interest because companies may have an incentive to place
homeowners in policies offered by their affiliates rather than looking for the
best rates on the open market. In other cases, there may have been kickbacks
between unrelated companies.
Potential wrongdoing may
occur when both mortgage servicing and insurance units are within the same
company or affiliated in some way. The investigation is yet another legal
battle for the nation’s largest banks and points to the sorts of problems they
may continue to face nationwide.
It can be argued that the
increased cost is to be expected to some degree because homeowners who missed
insurance payments on old policies are risky customers. However, Mr. Lawsky’s
office views some of the increases as exorbitant. For instance, in one case his
office is examining, a homeowner who paid $2,000 a year to State Farm ended up
paying $6,000 a year to a new insurer.
In many cases, banks are
servicing loans on behalf of mortgage security investors, and banks have a duty
to maximize recoveries on behalf of those investors. Force-placed insurance is
one way banks try to protect against losses.
The investigators are
looking for the potential conflict at Bank of America involving a unit called
Balboa Insurance that it owned until last year. That unit’s interaction with
the bank’s mortgage servicing is an important focus for Mr. Lawsky.
JPMorgan is a focus of
the inquiry because in recent years, the bank held a small financial stake in
an insurance company called Assurant on behalf of its clients.
Mr. Lawsky’s office is also investigating banks
that do not own insurance companies to see if they received kickbacks for
steering their mortgage clients’ business to particular insurers. His office
has not yet reached a settlement in this area with a large bank, but some
smaller players in mortgage servicing, like Goldman Sachs, have already agreed
to his demands that they change their practices with force-placed insurance. Mr.
Lawsky’s investigation has already had positive outcomes for the average
American.
Three days of hearings were held in May regarding Mr. Lawsky’s
investigation. Consumer advocates at the hearing said force-placed insurance
typically costs three to 10 times the price of regular homeowners’ insurance.
Mr. Lawsky said the insurers appeared to be paying less than 25 cents in claims
for every dollar of premium they received, an extraordinarily low loss ratio.
Consumer advocates told
the regulators the force-placed insurance business appeared fraught with
sweetheart deals: A mortgage lender would take out the coverage with its own
handpicked insurer; the insurer, in turn, would recycle much of the money back
to the lender.
In some cases, the
insurers did this by buying reinsurance from a subsidiary of the same bank that
had brought them the insurance deal in the first place. In other cases, the
insurers would send a “commission” back to the bank, which also happened to
have its own insurance agency.
In some cases, the
insurers sent these payments to bank subsidiaries with no employees, raising
questions about what the money was for. For instance, Assurant sent payments to
Banc One, a reinsurance subsidiary of JPMorgan Chase that has no employees,
Banc One officials said under questioning. It is incorporated as a “captive,” a
type of insurer that provides little disclosure of its financial condition.
Representatives of these “Too Big to Fail” banks and insurers who
appeared at the hearing, said their business relationships and the profits from
them were appropriate and that they were cooperating with the department. However,
force-placed insurance has been extraordinarily profitable for these
goliath-like banks and insurers in the last few years, growing from $1.4
billioin in 2004 to $5.5 billion of premiums in 2010 alone.
Two insurers, Assurant and QBE Insurance, control about 90 percent
of the market for coverage in New York state. CitiMortgage did not testify at the hearings but a spokesman for
Citigroup, Sean Kevelighan, said that whenever a homeowner showed proof of
other insurance, the force-placed policy was canceled. “Hundreds of thousands
of people are going to get foreclosed on, and Chase is profiting immensely from
the reinsurance,” Mr. Lawsky said. “It just doesn’t smell right.”
J. Robert Hunter, the
director of insurance for the Consumer Federation of America, said he thought
the round-trip transactions gave banks a financial incentive to buy the
highest-priced insurance, because then they stood to get a bigger share back.
Mr. Hunter told Mr.
Lawsky that force-placed insurers should be required to charge premiums that
were in line with their cost of doing business, something now required of
health insurers.
Class-action lawsuits on behalf of homeowners
have been filed around the country. The majority of these suits have been filed
in Florida, New Jersey and New York. The lawsuits in Florida allege Wells Fargo
received an 11 percent commission from Assurant for every force-placed policy
the insurance company issued to the bank’s note holders. Wells Fargo has since
stopped accepting those commissions, said bank spokesman Tom Goyda — but not
before the bank collected $177 million in “pure profit” from Assurant on such
transactions, the suit alleges.
Assurant handles 80 percent of Wells Fargo’s
force-placed policies, while QBE Insurance — a defendant named in another Florida
suit — issues the rest.
