By Steve Viuker
Sub-prime mortgages. Mark-to-market trading losses. Over-the-counter swaps. And now forced placed insurance joined the list of no-no’s be claimed against the financial industry.
On May 17, 2012, Nichols Kaster, PLLP, filed a class action lawsuit in the Northern District of New York on behalf of plaintiff Gordon Casey and other borrowers with mortgages serviced by Citibank or Midland Mortgage. The complaint alleges that Citibank and Midland Mortgage routinely force-place excessive amounts of flood insurance on borrowers, and improperly arrange for commissions for themselves or their affiliates on force-placed policies.
“We have cases against every major bank in the country relating to flood and/or forced place insurance,” said Kai Richter, an attorney with Nichols Kaster. “We also filed a case against GMAC mortgage, but they recently filed for bankruptcy. So the portion of the case related to the GMAC is stayed. But it is still proceeding as to Balboa Insurance Services.”
“The pace of the lawsuits has picked up as has the regulatory scrutiny,” said Richter. “From my perspective, it confirms what we thought all along. Our first case was filed at the end of March, 2010. This is not just a New York state issue, but a nationwide one. We have had cases on the East Coast, in California, Kentucky and in Minneapolis.”
Earlier this year, his firm won a $9.65 million class-action suit against Chase Home Finance. In that case, Chase had to stop both taking commissions from selling force-placed insurance and requiring insurance above the loan balances. According to The New York Times, the only customers who won relief were the 40,000 who were part of the suit, and the award was only enough to refund about two-thirds of their money.
In order to obtain a mortgage, lending banks often require homeowners to maintain specified levels of insurance on their property. Many homeowners do not realize that pursuant to the mortgage loan contract, if they allow their insurance to lapse, the lending bank is legally entitled to forcibly place insurance on the property (i.e. purchase insurance for the home and then charge the homeowner/borrower the full cost of the premium).
However, the force-placed insurance practices of many banks appear to be unfair because these lenders have:
Purchased insurance coverage that far exceeds the value of the homeowner’s previous coverage.
Received commissions or kick-backs from the insurer for the forced-placed coverage
Billed homeowners for additional coverage that was not required under their mortgage agreement.
Backdated the force-placed insurance policies to charge for retroactive coverage.
Allowed the homeowner’s existing coverage to lapse without providing adequate notice that they would purchase force-placed insurance.
In October 2011, The New York State Department of Financial Services (NYDFS), which supervises both the New York insurance and banking industry, commenced an investigation into force-placed insurance. Earlier this year, the NYDFS began three days of hearings in connection with its own investigation of the force-placed insurance practices of several banks, including Citibank.
According to the Nichols Kaster complaint, Citibank unlawfully required Casey to carry flood insurance coverage that exceeded the amount of his loan balance by more than $100,000. After Casey’s mortgage was acquired by Midland, Midland required Casey to carry an even greater amount of flood insurance ($237,349). Midland’s requirement was approximately 14 times Casey’s loan balance of less than $17,000.
The lawsuit further alleges that both Citibank and Midland Mortgage purchased expensive “force-placed” insurance coverage out of Casey’s escrow account to meet their onerous flood insurance requirements, which are inconsistent with the terms of plaintiff’s mortgage, HUD requirements, and federal law. In connection with this force-placed coverage, the lawsuit alleges that both lenders and/or their affiliates received improper kickbacks or commissions.
In his class action complaint, Casey seeks relief on behalf of himself and other borrowers across the country who have been similarly affected by Citibank’s and Midland’s alleged conduct. Based on this alleged conduct, the complaint asserts claims against Citibank and Midland for:
Breach of contract/breach of the covenant of good faith and fair dealing.
Breach of fiduciary duty in connection with mortgage escrow accounts.
Violation of the New York Deceptive Practices Act.
Violation of the federal Truth-In-Lending Act.
Nichols Kaster is currently pursuing similar cases against: JPMorgan Chase Bank, N.A.; Bank of America, N.A.; Wells Fargo Bank, N.A.; U.S. Bank, N.A.; and RBS Citizens, N.A.
“The two themes that are consistent in our cases deal with excess amounts of coverage and what we allege to be unlawful commissions or kickbacks in connection with forced place insurance either to the lender or its affiliate,” said Richter. “In some cases, the lenders have denied they have received commissions.”
Abbey Spanier Rodd & Abrams, LLP, also announced that it is investigating potential federal and state claims against numerous banks and insurance companies for their unfair force-placed insurance practices.
Abbey Spanier is investigating the force-placed insurance practices of numerous banks and financial services companies, including: Wells Fargo Bank, N.A.; JPMorgan Chase Bank, N.A.; HSBC Mortgage Corporation (USA); GMAC Mortgage, LLC; Bank of America, N.A.; Balboa Insurance Company; QBE Insurance Corporation; QBE Financial Institution Risk Services, Inc.; American Security Insurance Company (Assurant); American Bankers Insurance Company of Florida (Assurant); Meritplan Insurance Company; American Modern Home Insurance Company; Empire Fire and Marine Insurance Company; and Fidelity and Deposit Company of Maryland.
And Kirby McInerney LLP said that it is investigating potential class action claims against Wells Fargo Home Mortgage in connection with a scheme to improperly inflate the cost of force-placed hazard insurance. Kirby McInerney is investigating whether Wells Fargo has procured kickbacks from its force-placed insurance providers in connection with the mortgage loans in its servicing portfolios. It is believed that the premiums paid by Wells Fargo to the providers are grossed up to include the dollar value of the kickbacks and, furthermore, that Wells Fargo’s demands to borrowers for reimbursement are based on these inflated sums.
Kirby McInerney’s investigation of Wells Fargo follows the law firm’s recent filing, in the United States District Court for the Southern District of New York, of a class action lawsuit alleging similar misconduct on the part of GMAC Mortgage, LLC.
“We’re not done but it’s hard for me to say when there will be anything further,” said David Neustadt, deputy superintendent for public affairs for the NYDFS. “But the hearings raised many questions and it’s safe to say that we’ll be following up on what we learned.”