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Banksters: Left no stone unturned re "force-placed" insurance scandal

Posted by on in Bankers A Law Unto Themselves
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It’s all perfectly sensible in theory. But in practice, it’s ripe for abuse, especially when the servicer owns the insurer.

But Everbank allegedly let that insurance policy lapse, allowing it to replace the policy with a different policy, this one costing more than $33,000. The insurer, a subsidiary of Assurant, then paid Everbank a $7,100 kickback for giving it such a lucrative policy --and, “left the door open to further compensation” down the road.

$7,100 is an insanely enormous amount of money for a loan servicer to make on a single property: And of course it’s not the servicer paying that $33,000 insurance premium --that money is ultimately paid by the investors who bought the loan. Those investors are, understandably, not happy

The force-placed insurance scandal --By Felix Salmon 

 
NOV 9, 2010

American Banker’s Jeff Horwitz has a spectacular piece of reporting today about goings on in an obscure corner of the mortgage-servicing world known as force-placed insurance.

Essentially, if a homeowner fails to keep up their insurance premiums, then their loan servicer will step in and buy an insurance policy on their behalf, to ensure the home remains insured. It’s all perfectly sensible in theory. But in practice, it’s ripe for abuse, especially when the servicer owns the insurer.

Consider one case found by Horwitz. A homeowner had a $4,000 insurance policy, which was paid by the loan servicer, Everbank, from an escrow account. But Everbank allegedly let that insurance policy lapse, allowing it to replace the policy with a different policy, this one costing more than $33,000. The insurer, a subsidiary of Assurant, then paid Everbank a $7,100 kickback for giving it such a lucrative policy — and, writes Horwitz, “left the door open to further compensation” down the road.

$7,100 is an insanely enormous amount of money for a loan servicer to make on a single property: the average loan servicer makes just $51 per loan per year. And of course it’s not the servicer paying that $33,000 insurance premium — that money is ultimately paid by the investors who bought the loan. Those investors are, understandably, not happy.

There are lots of variations on the force-placed insurance scam. For instance, JPMorgan Chase buys overpriced insurance from a third-party insurer, which then reinsures the property with JPMorgan Chase. This is doubly evil: it not only means that investors are paying far too much money for the insurance, but it also means that, as both the servicer and the ultimate insurer of the property, JPMorgan Chase has every incentive not to pursue claims on the houses it services. Investors, of course, would love to recoup any losses from the insurer, but they can’t bring such a claim — only the servicer can do that.

Then there’s the practice of back-dating insurance — essentially, buying insurance against an event which you know for a fact hasn’t happened. Horwitz talked to attorney Jeff Golant, who was trying to sort out his mother’s mortgage:

His client was current on her mortgage and claimed the lapse of insurance coverage on her home was the result of her previous insurer’s error. Much of the new policy’s coverage was redundant, Golant said, duplicating flood and wind policies that had remained in place. Moreover, charging her for retroactive hurricane protection, for a year when there had been no significant storms, struck Golant as inherently ridiculous.

“I really thought they’d added an extra digit,” he said.

The National Association of Insurance Commissioners says that policies “should not be back-dated to collect premiums for a time period that has already passed,” but the practice seems to be commonplace in the world of force-placed insurance. As is the existence of extremely cozy relationships between insurer and servicer:

The case got stranger when Golant’s client visited the address listed for the insurer in an unsuccessful attempt to sort things out, he said. While the people there claimed to represent the servicer, they were operating out of an office belonging to a force-placed policy insurer since acquired by QBE Insurance Group.

Golant didn’t understand why the insurer would be speaking on behalf of the servicer. But shortly after he began asking questions about the relationship between servicer and insurer, the case settled. Confidentially. At the insurer’s request…

According to both Assurant’s SEC filings and the marketing materials of a subsidiary of rival QBE Insurance Group, the insurers don’t just write policies on request — they also enter into long-term agreements to detect uninsured properties in their clients’ servicing portfolios and perform other back-office functions. It was precisely such an arrangement that Golant’s first client ran into when she tried to visit her servicer, he says — the insurance company employees had taken over the servicer’s role.

Horwitz has found one case where an $80,000 property was being insured for $10,000 a year, and also notes that at Assurant, “the unit handling force-placed insurance has accounted for $811 million of its $879 million in profits during the last two years.”

The good news here is that there’s a specific provision in the Dodd-Frank act requiring that force-placed insurance be “bona fide and reasonable”. The bad news is that it’s far from clear who is in a position to enforce that particular law. And in the meantime, loan servicers would seem to have every incentive to drag out delinquencies as long as possible, if doing so means they get massive insurance revenues. Or the kickbacks associated with them.

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  • doyla66
    doyla66 Sunday, 28 October 2012

    Isn't that typical? Nice law/reg - but who enforces it? Maybe that should be included in every piece of legislation, every reg and every code. WHO'S RESPONSIBLE?
    Is QBE an Australian insurance company?
    You can bet your bottom dollar that Australia will continue to follow in the failing footsteps of the US because we lack the intelligence, insight and imagination at the top of the tree to do anything differently with this confounded financial mess. This is largely due to the failure of our softly softly regulators to provide accurate and up to date facts and figures to those who depend on them for decision making and forward planning and the tendency to spin Australia into something golden and wondrous without attending to the foundations of this belief system. When we pay the IMF to give us good ratings and then quote their approval as our referee in credibility the inmates have taken over the asylum. As they say in PR: believing your own media release is one of the first signs of insanity.
    At this time where we still have a chance to manoeuvre our ship of state, could we at least take the best of US and UK regulation and apply that for the time being? At least we might get financial regulation off zombie life support.
    In such a creatively clever country the world must be wondering why Australians can't think for themselves or come up with something better than the sleeping dogs that guard our common wealth - what's left of it, that is.
    How about we follow the Yellow Brick Road instead of the Road to Nowhere, just for starters?

  • doyla66
    doyla66 Sunday, 28 October 2012

    Regulators May Crack Down on Mortgage Insurance

    The newly formed [US] Consumer Financial Protection Bureau[CFPB] is proposing new rules to crack down on mortgage servicers' use of force-placed insurance, also called lender-placed insurance.

    Regulators May Crack Down on Mortgage Insurance
    http://www.cnbc.com/id/48599389/Regulators_May_Crack_Down_on_Mortgage_Insurance

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