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Bank of America Settles Forced-Place Insurance Claims for $228M

I’m glad to see this issue has finally been given the attention it deserves, as many home buyers were subjected to illegal “forced placed” coverage when mortgage companies constantly “sold” mortgages (with tax/insurance escrow accounts) to each other. It seems like everything but the insurance information would be provided to the new lender so they would automatically issued the forced placed coverage. When a home buyer would call the mortgage company he would always be told their monthly increases was because of the insurance costs. And he would never be told it was forced placed coverage. In the state of Main, these costs, for instance, often were in the range of $2,700 to $3,500 per year causing monthly increases of $200-400.

On November 10, 2010, American Banker published an article describing major mortgage lenders’ and servicers’ questionable and often illegal practices related to force-placed
insurance. The article revealed for the first time the exceptionally profitable exclusive relationships, collusive activities, and circular arrangements among the mortgage lenders and
servicers, their affiliates, and their cooperating insurers, most of which are Defendants here.
Lenders and servicers force place insurance when a borrower fails to obtain or maintain proper hazard or flood insurance coverage on property that secures a loan. Under the
typical mortgage agreement, if the insurance policy lapses or provides insufficient coverage, the lender has the right to “force place” a new policy on the property and then charge the premiums
to the borrower.
The arrangements revealed by American Banker comprise an extremely lucrative profit-making scheme in the hundreds of millions of dollars. There are just two insurance companies that control the entire market for forced-placed policies in the country — Assurant and QBE.
Assurant works through its subsidiaries Voyager Indemnity Insurance Company and American Security Insurance Company. These companies and their affiliates enter into exclusive relationships with the major mortgage lenders and servicers to provide the policies. The top four servicers that work with Assurant are Wells Fargo Bank, Citi, HSBC, and Chase. The top servicer that works with QBE/Balboa is Bank of America.
To maintain their exclusive relationships with these lenders, the insurers pay unearned “kickbacks” of a percentage of the force-placed premiums ultimately charged to the borrower, offer them subsidized administrative services, and/or enter into lucrative captive reinsurance deals with them.

Although force-placed insurance is designed to protect the lender’s interest in the property that secures the loan and thus should not exceed that interest, lenders often purchase
coverage from their exclusive insurers in excess of that required to cover their own risk. And, as a matter of practice, the major lenders and servicers collude with the two major force-placed
insurers to manipulate the force-placed insurance market and artificially inflate the premiums charged consumers, resulting in premiums up to ten times greater than those available to the
consumer in the open market. American Banker reported that “Though part of the extra expense can be explained by the higher risks associated with insuring the homes of delinquent borrowers,
force-placed policies generate profit margins unheard of elsewhere in the insurance industry even after accounting for the generous commissions and other payments that servicers demand.”

But finally Bank of America Corp. agreed to pay $228 million to settle claims the bank overcharged for insurance homeowners were forced to accept when their regular policies lapsed. The amount was disclosed in a document requesting approval for the accord filed yesterday in Miami federal court. Lawyers for homeowners told a federal judge in February that the Charlotte, North Carolina-based bank had agreed to a deal without providing further information.

The deal is an “extraordinary settlement” that provides “prospective relief that would effectively end the lender- placed insurance practices at issue in this case,” lawyers for plaintiffs said in the Bank of America case.

Wells Fargo & Co., HSBC Holdings Plc, JPMorgan Chase & Co. and Citigroup Inc. have also agreed to similar accords in cases alleging that banks got a financial windfall by cutting deals with insurance companies and over-charging borrowers for property coverage.

Attorneys will seek as much as $16 million in fees, according to the filing.

As part of their settlements, JPMorgan will pay $300 million and Citigroup will pay $110 million. HSBC agreed to pay $32 million, according to a separate proposed settlement. The amount of Wells Fargo’s settlement hasn’t yet been specified.

The case is Hall v. Bank of America N.A., 1:12-cv-22700, U.S. District Court, Southern District of Florida (Miami).