Claims and Bad Faith Law Blog

Force-placed Insurance: Why do some lenders purchase unnecessary policies?

This is the next in a continuing series of articles reprinted from the manuscript of the author's article published by Westlaw Publishing Co., "Force-placed, Lender-placed Insurance Class Actions:  Is the Lender Placement of Insurance Authorized by Law, Or Simply Beyond the Reach of the Courts?", 35 Insurance Litigation Reporter 221 (2013) © 2013 Thomson Reuters.  Installments in this series will alternately be presented here and on Insurance Claims and issues Blog.  Permission to reprint from the author's manuscript is given by John K. DiMugno, Esquire, Editor-in-Chief of ILR, by Thomson Reuters Westlaw, and by the author.

2.  The Three Most Commonly Alleged Clusters of Fact in Force-Placed Insurance:  Kickbacks, purchasing unnecessary policies, and backdating.

* * *

     b.  Purchasing unnecessary insurance policies and coverage.  This set of allegations is self-explanatory.  The borrowers-plaintiffs generally allege that the defendant lenders use their contractual authorizations to force the placement of insurance when it was not needed, or in amounts that are greater than necessary to protect their interests in the secured property.[1]

     This set of allegations is deceptively easy to understand.  This is the central question among many issues involved in presenting and defending claims spawned by the forced placement of insurance:  What amount of money is "necessary to protect the lender's interest" in the secured property?

   The decided cases settle between majority and minority answers to this question.  The majority view is the settled view.  District Courts holding this view are of the opinion that "[t]he purpose of a force-placement clause is to protect the lender's interest in the property securing the mortgage loan."[2]  The lender's interest in the property securing the mortgage loan is nothing more than what the contract documents protect, i.e., the amount remaining on the balance of the loan extended to the borrower including accumulated interest and authorized charges.[3]  "The question, of course, is not what amount of flood [or other] insurance a lender reasonably could require, but what this particular HUD [or any] mortgage provision in fact permits the lender to demand."[4] 

   The minority view appears to be more recent.  It holds that the lender's interest in the secured property can increase as the value of the secured property increases.  Magistrate Judges and District Judges following this view have found no actionable conduct, therefore, in a lender forcing the placement of insurance in an amount that reflects the "replacement value" of the secured property.[5]

   The rationale behind the minority view is not so much a rationale as received doctrine replacing traditional legal concepts of a "security interest" in the secured property.  The established legal concepts of security include the idea that the Courts protect security interests in order to secure the repayment of loans.  "'Security interest' means an interest in personal property or fixtures which secures payment or performance of an obligation."[6]  This is the clear understanding of the term to date, both in the law and among the population at large.[7]  Current lenders may wish to have the Courts enforce a different understanding.  However, the long-established majority view of a security interest is that the Courts protect security interests in order to secure the repayment of loans.

   In contrast, the minority doctrine or contrary view has it that instead it is in the lender's best interest for the loan not to be repaid; the longer the loan is outstanding and unpaid, the more money the lender can make with its investment, and the property exists for the purpose of providing the lender with a return on its investment paid for by the borrower in addition to the loan amount plus interest for which the lender and borrower contracted.  This position was advanced and quoted at great length in a fairly recent decision, for which we are indebted to the U.S. Magistrate Judge who took the time to quote this lengthy passage from Wells Fargo's Reply in Support of Defendants' Motion to Dismiss in the case of McKenzie v. Wells Fargo Home Mortgage, Inc.[8]:

To be continued ....

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[1] E.g., Lass v. Bank of America, N.A., 695 F.3d 129, 138-39 & 39 n.19 (1st Cir. 2012); Lane v. Wells Fargo Bank N.A., 2013 WL 269133 *1 (N.D. Cal. January 24, 2013); Hofstetter v. Chase Home Finance, LLC, 2010 WL 3259773 * 3 (N.D. Cal. August 16, 2010).  This is not the same thing as saying merely that the lenders and insurance companies have increased the financial burden faced by borrowers, an argument which has not fared very well in the Courts.  However, without proof that increased cost has been the result, in April, 2013 a Federal agency settled with four mortgage insurance companies over charges that the companies chose to incur a charge -- which was apparently added to the borrowers' costs -- for "captive reinsurance" offered at higher prices than the reinsurance market would ordinarily bear for comparable reinsurance, allegedly because the reinsurance they chose was offered through a "captive" company affiliated with the given lender, i.e., that the mortgage insurance companies were paying kickbacks to lenders in exchange for customers.  See, e.g., Press Release, "The CFPB Takes Action Against Mortgage Insurers to End Kickbacks to Lenders" (Consumer Financial Protection Bureau, April 4, 2013); Jim Puzzanghera, "Regulators Probing Alleged Mortgage Insurance Kickback Scheme" (Los Angeles Times Online at www.latimes.com, posted April 4, 2013).

 

[2] Montanez v. HSBC Mortgage Corp., 876 F. Supp. 2d 504, 513 (E.D. Pa. 2012).

 

[3] E.g., Lass v. Bank of America, N.A., 695 F.3d 129, 135-36 (1st Cir. 2012)(case involved Massachusetts substantive law); Kolbe v. BAC Home Loans Servicing, LP, 695 F.3d 111, 120 (1st Cir. 2012)(observing in case involving New Jersey substantive law:  "We acknowledge that lenders may have good reason to require replacement coverage.  Nonetheless, ... Congress in the NFIA [National Flood Insurance Act] appears to have incorporated the assumption that, at times, a more limited amount of flood insurance  may be reasonable and appropriate."); see, e.g., McNeary-Calloway v. JP Morgan Chase Bank, N.A., 863 F. Supp. 2d 928, 935, 955-56 (N.D. Cal. 2012)(Spero, USMJ; California plaintiffs and New Jersey plaintiff stated claims for breach of contract, with allegations that in part the defendants JPMorgan Chase and Chase Bank breached their mortgage contracts by force-placing "duplicative" insurance); Hofstetter v. Chase Home Finance, LLC, 2010 WL 3259773 *10 (N.D. Cal. August 16, 2010)("Since plaintiff owed the bank nothing and could not draw any funds on the line (and would have had to file and prevail on a written appeal with the bank to have her credit limit reinstated), the bank faced zero risk that it would incur uninsured losses under the loan due to flooding....  The bank nevertheless purchased a $175,000 flood insurance policy through an affiliate--likely earning a commission in the process--and billed plaintiff for the trouble.  This maneuver was not required under the NFIA [National Flood Insurance Act].")  [Emphasis by the Court.]

 

[4] Kolbe v. BAC Home Loans Servicing, LP, 695 F.3d 111, 121 (1st Cir. 2012)(case involved New Jersey substantive law).

 

[5] The most recent exposition of this view came in the case of Cannon v. Wells Fargo Bank N.A., 2013 WL 132450 (N.D. Cal. January 9, 2013).  The District Judge in that case relied on two opinions in previously decided cases  -- one by U.S. Magistrate Judge Spero in California, and one by appellate judge Boudin dissenting in a case from Massachusetts -- to hold that a lender was authorized by standard mortgage contract  provisions to force the placement of insurance with policy limits at replacement value, not merely with the policy limits necessary to pay off the loan.  "The Court agrees with Judge Spero and Judge Boudin that a lender's interest is not limited to the outstanding principal."  Cannon v. Wells Fargo Bank N.A., 2013 WL 132450 *12 (N.D. Cal. January 9, 2013).

      The Alabama Supreme Court's decision in Custer v. Homeside Lending, Inc., 858 So. 2d 233 (Ala. 2003) is often cited as being in accord with this minority view.  However, the Alabama Supreme Court actually split its votes.  For all that appears from the reported decision, four Alabama Supreme Court Justices decided this putative class action case in which, again, the issue of class action certification was not reached. Three Justices voted to affirm the dismissal of mortgagors'-borrowers' alleged breach of contract cause of action on the ground that as to the flood insurance at issue, the mortgagee could require that the flood insurance policy limits be obtained by the borrower in excess of the remaining mortgage loan balance; one Justice concurred in part in the rationale but wrote to expressly leave open "the question whether the NFIA [National Flood Insurance Act] affirmatively authorizes a mortgage lender to force-place flood insurance in an amount greater than the lender's exposure in a mortgage," id. at 249,  while also concurring in the result; and the five (5) remaining Alabama Supreme Court Justices on the Court at the time, do not make an appearance in the decision with a record of their votes nor any opinions in dissent.

    

[6] U.C.C. § 1-201(37).

 

[7] See, e.g., Black's Law Dictionary 1217 (Special Deluxe 5th ed. 1979)("A form of interest in property which provides that the property may be sold on default in order to satisfy the obligation for which the security interest is given....  The term 'security interest' means any interest in property acquired by contract for the purpose of securing payment or performance of an obligation or indemnifying against loss or liability."); Merriam Webster Dictionary Online, definition of "security interest," found at http://www.merriam-webster.com/dictionary/security%20interest; "security interest" definition, Webster's Ninth New Collegiate Dictionary p. 1062 (1987); Wikipedia Encyclopedia definition of "security interest," at www.wikipedia.org.  According to both Merriam Webster Dictionary Online and Webster's Ninth New Collegiate Dictionary, the term first came into use in 1951 with this understanding.

 

[8] McKenzie v. Wells Fargo Home Mort., Inc., 2012 WL 5372120 *11-*12 (Spero, USMJ, October 30, 2012)(quoting Wells Fargo's Reply in Support of Defendants' Motion to Dismiss).  [Emphasis added.]  Authorship of the quoted passage has been attributed to the U.S. Magistrate Judge instead of to the Wells Fargo Memorandum.  Cannon v. Wells Fargo Bank N.A., 2013 WL 132450 *12 (N.D. Cal. January 9, 2013).

 To be continued ....

 

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Force-Placed Insurance: Common Clusters of Facts.

This is the next in a continuing series of articles reprinted from the manuscript of the author's article published by Westlaw Publishing Co., "Force-placed, Lender-placed Insurance Class Actions:  Is the Lender Placement of Insurance Authorized by Law, Or Simply Beyond the Reach of the Courts?", 35 Insurance Litigation Reporter 221 (2013) © 2013 Thomson Reuters.  Installments in this series will alternately be presented here and on Insurance Claims and issues Blog.  Permission to reprint from the author's manuscript is given by John K. DiMugno, Esquire, Editor-in-Chief of ILR, by Thomson Reuters Westlaw, and by the author.

2.  The Three Most Commonly Alleged Clusters of Fact in Force-Placed Insurance:  Kickbacks, purchasing unnecessary policies, and backdating.

 

   a.  Kickbacks. The game is afoot, it would appear, even to one whose name is not Sherlock Holmes.  Three common themes run throughout the putative class action cases in which claims are alleged as a result of the forced placement of insurance.  They are each part and parcel of an alleged scheme in most cases.

The first note in this theme is the allegation that the defendant lenders or that the defendant mortgage servicers which are affiliates of the plaintiffs' mortgage lenders, place insurance with insurance companies which in turn provide the lenders with "commissions," or a percentage of the premium.  Most plaintiffs expressly allege that these payments are "kickbacks".[1]

     Alternatively, the borrowers-plaintiffs allege that the lenders force the placement of insurance with their subsidiary insurance corporations.[2]  Either way, the conduct complained of is the lender's alleged receipt of a payment from the insurance companies which the lender selects to provide the insurance coverage at the expense of the borrower-plaintiff.

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[1] E.g., Cannon v. Wells Fargo Bank N.A., 2013 WL 132450 *2 (N.D. Cal. January 9, 2013); Ellsworth v. U.S. Bank, N.A., 2012 WL 6176905 *1, *2, *3, *15 (N.D. Cal. December 11, 2012); Williams v. Wells Fargo Bank N.A., 2011 WL 4901346 *2 (S.D. Fla. October 24, 2011); see Lass v. Bank of America, N.A., 695 F.3d 129, 138 (1st Cir. 2012).  In the case of Lane v. Wells Fargo Bank N.A., 2013 WL 169133 *2 (N.D. Cal. January 24, 2013), the plaintiffs alleged that the payments taken out of the premiums and remitted to the lenders were "'kickbacks or unwarranted "commissions"'."  [Emphasis added.]

 

[2] E.g., Lass v. Bank of America, N.A., 695 F.3d 129, 139-40 & 139 n.19 (1st Cir. 2012); McNeary-Calloway v. JP Morgan Chase Bank, N.A., 863 F. Supp. 2d 928, 937-38 (N.D. Cal. 2012); Williams v. Wells Fargo Bank N.A., 2011 WL 4901346 *2 (S.D. Fla. October 24, 2011).  In some cases, plaintiffs allege that the defendant lender canceled the borrower's "existing policy and force-placed coverage with another carrier."  McNeary-Calloway v. JP Morgan Chase Bank, N.A., 863 F. Supp. 2d 928, 937 (N.D. Cal. 2012).

      Allegations are different from proof, of course.  In the only Summary Judgment case found to date among the putative class action cases of claims resulting from force-placed insurance, the District Judge ruled that the plaintiffs failed to put proof in the record sufficient to withstand summary judgment, Webb v. Chase Manhattan Mort. Corp., 2008 WL 2230696 *20 (S.D. Ohio May 28, 2008)("Plaintiff Webb has also alleged that Chase was paid a commission by ASIC ... however, there is no evidence to support Plaintiff's assertions.  In fact, the evidence proves otherwise."), regardless of whether the alleged kickbacks furnished the basis for legal claims, or not.

End of part 5 of a continuing series.  Please Read The Disclaimer.

The Substantive Issues of Force-Placed Insurance: Pleading Issues.

This is the next in a continuing series of articles reprinted from the manuscript of the author's article published by Westlaw Publishing Co., "Force-placed, Lender-placed Insurance Class Actions:  Is the Lender Placement of Insurance Authorized by Law, Or Simply Beyond the Reach of the Courts?", 35 Insurance Litigation Reporter 221 (2013) © 2013 Thomson Reuters.  Installments in this series will alternately be presented here and on Insurance Claims and issues Blog.  Permission to reprint from the author's manuscript is given by John K. DiMugno, Esquire, Editor-in-Chief of ILR, by Thomson Reuters Westlaw, and by the author.

II.  THE SUBSTANTIVE ISSUES OF FORCE-PLACED INSURANCE:   SUCCESS OR FAILURE IN STATING CLAIMS.

      II. A. The prevailing Federal standard for failure to state a claim upon which relief can be granted under Rule 12(b)(6).  As was noted previously, the great majority of cases which have been located in which claims have been alleged as a result of force-placed insurance have been resolved under Federal Rule of Civil Procedure 12(b)(6) for alleged failure to state claims upon which relief can be granted.

     Rule 12(b)(6) motions to dismiss are resolved using a two-pronged approach:  First, the trial Court must disregard "legal conclusions" and "naked assertions" alleged in the complaint, and second, the Court must examine the claims alleged in the complaint for "facial plausibility".[1]  "Facial plausibility" involves the "nub" of the complaint, meaning allegations of fact that are  well-pleaded, and not merely speculative.[2]

     Further, the allegations of fact pleaded in the putative class action plaintiffs' complaint are often consulted by the District Courts on Rule 12(b)(6) motions as a challenge to the plaintiffs' standing to state claims on behalf of an entire class.[3]

 

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[1] E.g., Montanez v. HSBC Mortgage Corp., 876 F. Supp. 2d 504, 510(E.D. Pa. 2012); Williams v. Wells Fargo Bank, N.A., 2011 WL 4901346 *3 (S.D. Fla. October 14, 2011); see, e.g., Lane v. Wells Fargo Bank N.A., 2013 WL 269133 *3 (N.D. Cal. January 24, 2013).

 

[2] E.g., Cannon v. Wells Fargo Bank N.A., 2013 WL 132450 *3 (N.D. Cal. January 9, 2013); see, e.g., Cannon v. Wells Fargo Banks, N.A.,  2013 WL 764964 *8 (D.D.C. March 1, 2013); Abels v. JPMorgan Chase Bank, N.A., 678 F. Supp. 2d 1273, 1276 (S.D. Fla. 2009).

 

[3] E.g., Lane v. Wells Fargo Bank N.A., 2013 WL 269133 *4 (N.D. Cal. January 24, 2013); Montanez v. HSBC Mortgage Corp., 876 F. Supp. 2d 504, 512(E.D. Pa. 2012).

End of Part 3; to be continued.  Please Read The Disclaimer.

Claims and Causes of Action in Force-Placed Insurance Cases.

This is part of a series of posted articles on Force-Placed, Lender-Placed Insurance under standard Mortgage provisions.  See also the articles posted here on March 5, 2013 and March 24, 2013, and the article posted on Insurance Claims and Issues Blog on March 13, 2013.  

See also the article written by the author on the same subject of Force-placed, Lender-placed insurance,  "Force-placed, Lender-placed Insurance Class Actions:  Is the Lender Placement of Insurance Authorized by Law, Or Simply Beyond the Reach of the Courts?" which was published earlier this year in 35 Insurance Litigation Reporter 221 (May 2013). 

  It is important to recall that the subject of the case law developed throughout these articles, is NOT "Bad Faith" alleged against Insurance Companies under Insurance Policies but instead an examination of the recognized claims and causes of action against Mortgagees and their Mortgage Servicers in some situations, over their alleged bad faith or unfair forced placement of the costs of insurance on Mortgagors-Borrowers. 

           1.  Breach of Contract.  The most frequently alleged claim or cause of action in force-placed insurance cases is breach of contract.[1]  Most Federal Courts in most cases have denied Rule 12(b)(6) motions to dismiss for failure to state a breach of contract claim upon which relief could be granted.  The Federal Courts and State Courts alike have resolved several problems inherent in the allegations of breach of contract in these cases.

          Only a party to a contract can breach the contract.  It has therefore been held that a mortgage servicer is not ordinarily a party to the mortgage contract.  For that reason, a mortgage servicer will ordinarily be dismissed from a lawsuit or claim alleging only breach of a contract to which the mortgage servicer is not a party.[2]

          As discussed in previous posts, there are majority and minority views among the Courts on the issue of whether a lender can force the placement of insurance in amounts above the amount of the loan balance.  Following the minority view, for example, which is that a lender (or Mortgagee) can force the placement of insurance in amounts which exceed the remaining balance of the loan, a District Judge wrote that "[t]his order finds that Wells Fargo did not breach its contract with plaintiffs simply by requiring flood insurance above the minimum amount required by federal law.  Plaintiffs have not alleged that the $58,000 of insurance required and purchased by Wells Fargo for their property was over and above the replacement cost value."[3]

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[1] E.g., Lass v. Bank of America, N.A., 695 F.3d 129, 135, 137 (1st Cir. 2012)(Massachusetts law); Kolbe v. BAC Home Loans Servicing, LP,695 F.3d 111, 121-22 (1st Cir. 2012)(New Jersey law).  It is important to point out that the breach of contract claims alleged in the force-placed insurance cases are based on the same standard contract documents, including mortgage document forms posted on Freddie Mac's website, which the defendant lenders cite as their authority to force the placement of insurance in the first place.  "This language provides a basis for the claim that Defendants may force-place insurance only to the extent such insurance 'is necessary' to protect the property's value and Defendants' rights in the property."  McNeary-Calloway v. JP Morgan Chase Bank, N.A., 863 F. Supp. 2d 928, 956 (N.D. Cal. 2012)(Spero, USMJ).  Accord, Ellsworth v. U.S. Bank, N.A., 2012 WL 6176905 *16 (N.D. Cal. December 11, 2012)(Beeler, USMJ).   

[2] Cannon v. Wells Fargo Bank N.A., 2013 WL 132450 *22 (N.D. Cal. January 9, 2013).  See McKenzie v. Wells Fargo Home Mort., Inc., 2012 WL 5372120 *20 n.12 (N.D. Cal. October 30, 2012; Spero, USMJ).

[3] Lane v. Wells Fargo Bank N.A., 2013 WL 269133 *9 (N.D. Cal. January 24, 2013)(holding that lender's security interest included replacement cost value).  [Emphasis added.]

 To be continued ....  Please Read The Disclaimer.

 

FAIR DEALING: THE LAW ALREADY GOT THERE. Update: MORE IS NEEDED.

 

Force-Placed Insurance Issues in New York: Your State, Too.

 

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FHFA DEADLINE TODAY: INPUT RE FORCE-PLACED, LENDER-PLACED INSURANCE.

         The Federal Housing Finance Agency ("FHFA") has issued a Notice that it invites input on restrictions it should consider placing on Lender Placed (Force Placed) Insurance under Mortgages involving Fannie Mae and Freddie Mac:  Download LPIregister32613.pdf.FHFA Notice of Restrictions Proposed on Lender Placed Insurance Terms and Conditions.  The FHFA is the Conservator for these two government sponsored enterprises ("GSEs").

       Specifically, the FHFA is interested in hearing from anyone interested in these areas in which the FHFA is considering restrictions on Lender Placed Insurance:

The specific practices related to lender placed insurance that FHFA has determined pose risks to the Enterprises or run contrary to the duties of the Conservator and for which actions are specified are practices where there are concerns regarding conflicts between parties to the insurance agreement, including:

1. Certain Sales Commissions. The Enterprises shall prohibit sellers and servicers from receiving, directly or indirectly, remuneration associated with placing coverage with or maintaining placement with particular insurance providers.

2. Certain Reinsurance Activities. The Enterprises shall prohibit sellers and servicers from receiving, directly or indirectly, remuneration associated with an insurance provider ceding premiums to a reinsurer that is owned by, affiliated with or controlled by the sellers or servicer.

 Id. at 4.

           The period for input to the FHFA on this topic ends today, Tuesday, May 28, 2013.

           Here are the portals through which the FHFA will receive incoming input:

FHFA will accept public input through its Office of Housing and Regulatory Policy (OHRP), no later than [INSERT DATE 60 DAYS AFTER PUBLICATION IN THE FEDERAL REGISTER], as the agency moves forward with its deliberations on appropriate action. Communications may be addressed to Federal Housing Finance Agency, OHRP, Constitution Center, 400 Seventh Street SW., Ninth Floor, Washington, DC 20024, or emailed to LPIinput@fhfa.gov. Communications to FHFA may be made public and posted without change on the FHFA Web site at http://www.fhfa.gov, and would include any personal information provided, such as name, address (mailing and email), and telephone numbers.

Id. at 4-5.

          This is a unique opportunity.  If you do not provide input, who will?

A similar article here two months ago, on Thursday, March 28, 2013, and also an article on Wednesday, March 27, 2013 on Insurance Claims and Issues Blogsimilarly announced the opportunity provided by the FHFA to be heard on LPLI.

Please Read The Disclaimer.

OPPORTUNITY TO BE HEARD ON FORCE PLACED INSURANCE.

          The Federal Housing Finance Agency ("FHFA") has issued a Notice that it invites our Comments on restrictions it should consider placing on Lender Placed (Force Placed) Insurance under Mortgages involving Fannie Mae and Freddie Mac:  Download LPIregister32613.pdf.FHFA Notice of Restrictions Proposed on Lender Placed Insurance Terms and Conditions.  The FHFA is the Conservator for these two government sponsored enterprises ("GSEs").

          Specifically, the FHFA is interested in hearing from anyone interested in these areas in which the FHFA is considering restrictions on Lender Placed Insurance:

The specific practices related to lender placed insurance that FHFA has determined pose risks to the Enterprises or run contrary to the duties of the Conservator and for which actions are specified are practices where there are concerns regarding conflicts between parties to the insurance agreement, including:

1. Certain Sales Commissions. The Enterprises shall prohibit sellers and servicers from receiving, directly or indirectly, remuneration associated with placing coverage with or maintaining placement with particular insurance providers.

2. Certain Reinsurance Activities. The Enterprises shall prohibit sellers and servicers from receiving, directly or indirectly, remuneration associated with an insurance provider ceding premiums to a reinsurer that is owned by, affiliated with or controlled by the sellers or servicer.

 Id. at 4.

           The Comment period will end 60 days from publication of the FHFA Notice in the Federal Register.  In an abundance of caution, I am calendaring Friday, May 24, 2013 or the 60th day by my calculations after the Notice was signed by the FHFA Acting Director on March 25, 2013, in order to be absolutely certain my input makes the FHFA deadline.

          Here are the portals through which the FHFA will receive our incoming input:

FHFA will accept public input through its Office of Housing and Regulatory Policy (OHRP), no later than [INSERT DATE 60 DAYS AFTER PUBLICATION IN THE FEDERAL REGISTER], as the agency moves forward with its deliberations on appropriate action. Communications may be addressed to Federal Housing Finance Agency, OHRP, Constitution Center, 400 Seventh Street SW., Ninth Floor, Washington, DC 20024, or emailed to LPIinput@fhfa.gov. Communications to FHFA may be made public and posted without change on the FHFA Web site at http://www.fhfa.gov, and would include any personal information provided, such as name, address (mailing and email), and telephone numbers.

Id. at 4-5.

This is our opportunity to have our voices heard!  Won't you  join me in insuring that this opportunity is placed on Lender Placed Insurance?

A similar article on Wednesday, March 27, 2013 on Insurance Claims and Issues Blog similarly announced the opportunity provided by the FHFA to be heard on LPLI.

Please Read The Disclaimer.

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UPDATE on the Whole Financial Catastrophe, JPMorgan Also.

 More on the Good Faith of JPMorgan.  (This post updates the article by the same name, posted here on Tuesday, March 19, 2013.)

It seems that for a brief moment, at least, the immense power of the United States Senate Permanent Subcommittee on Investigations focused public attention on the possible misdeeds and definite mistakes of JPMorgan executives and its chief.  See, e.g., Ben Protess and Jessica Silver-Greenberg, "Trading Hearings Put Focus Back on JPMorgan's Chief" p. B1, col. 5 (New York Times Nat'l ed., "Business Day" Section, Monday, March 18, 2013); Jessica Silver-Greenberg, "JPMorgan Executives Face Withering Questions at Senate Hearing" p. B1, col. 1 (New York Times Nat'l ed., "Business Day" Section, Saturday, March 16, 2013).

It bears repetition to make the following observation once more, as was published here on March 19, 2013:

    One ironic feature of interest in JPMorgan's suspect trading activities, apparently totally unmentioned in the newspaper reports, is that JPMorgan was trading in  Credit Default Swaps (CDS's), otherwise known as unregulated Credit Insurance.  See "JPMorgan Chase Whale Trades:  A Case of History of Derivatives Risks and Abuses," Report of the Permanent Subcommittee on Investigations, Committee on Homeland Security, United States Senate, in particular pages 29-30 and search the document for "credit default swaps" (307 pages; stated "Released in Conjunction With The Permanent Subcommittee on Investigations March 15, 2013 Hearing"):  Download REPORT - JPMorgan Chase Whale Trades (3-15-13)2[1].    

 

Force-Placed Insurance?  One person's "commissions."  Other people call them "kickbacks."

The New York State Department of Financial Services reportedly has noted publicly "that JPMorgan Chase has made about $600 million since 2006 by taking 75 percent of the profit from the force-placed business it gave" to insurance giant Assurant, the country's largest force-placed insurer at this time.  Karen Freifeld and Ashutosh Pandey, "UPDATE 4--Assurant Settles With New York Over 'Force-Placed' Insurance" (Reuters Online, posted Thursday, March 21, 2013).

 

Assumption of the Risk?  But this isn't a lawsuit and there is no "Assumption of the Risk" Affirmative Defense to a Bad Faith Claim.  You're right.  This isn't a lawsuit.

So, after some 5 years, the question has changed:  If someone keeps on keeping on, making money at my expense, not changing their ways of doing it, and if I do nothing about it, have I learned my lesson?  See Jesse Eisinger, "Lesson Learned After Financial Crisis:  Nothing Much Has Changed" (Dealbook, New York Times, March 19, 2013).  See, in addition, Moyers & Company, airdate Friday, March 22, 2013, Bill Moyers interview with Sheila Bair, head of the Systemic Risk Council and most recently, Chair of the Federal Deposit Insurance Corporation.

Please Read The Disclaimer.

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BREAKING LAW NEWS: Force-Placed Insurance vs. ....

.... Implied Covenant of Good Faith, Fair Dealing.

          This post updates the article which was posted in two parts, first here on Tuesday, March 5, 2013, "Force-Placed Insurance vs. Implied Covenant of Good Faith, Fair Dealing," and on Wednesday, March 13, 2013 on Insurance Claims and Issues Weblog.

           In what qualifies for one of the more recent decisions on this issue, a District Judge in the U.S. District Court for the Southern District of Florida has entered an Opinion and Order Denying a Motion to Dismiss in a Force-Placed Insurance Putative Class Action:

Martorella v. Deutsche Bank National Trust Co., 2013 WL 1137514 (S.D. Fla. March 18, 2013).

          In pertinent part, the District Judge recognized the settled rule in Florida, as in most if not all other jurisdictions in the United States, that "[a] covenant of good faith and fair dealing is implied in every contract."  Martorella v. Deutsche Bank National Trust Co., 2013 WL 1137514 *5 (S.D. Fla. March 18, 2013).  Here, the Mortgagor-Plaintiff specifically alleged that the "Defendants breached the [standard form] mortgage agreement and the covenant of good faith and fair dealing implied therein".  Martorella v. Deutsche Bank National Trust Co., 2013 WL 1137514 *3 (S.D. Fla. March 18, 2013).  In Florida, again as in most U.S. jurisdictions, where a contracting party is vested with discretion by the contract, "the implied duty of good faith and fair dealing attaches as a gap-filling default."  The implied covenant "fills the gaps" by imposing on the contracting party which is vested with discretion, a legally enforceable duty "to act in a commercially reasonable manner that satisfies the reasonable expectations of the parties."  Martorella v. Deutsche Bank National Trust Co., 2013 WL 1137514 *6 (S.D. Fla. March 18, 2013).  Breach of the implied duty of good faith and fair dealing is enforceable at law in damages, and the Court held that such is the case here:

         Here, the force-placed insurance clause granted Defendants discretion in determining whether to purchase force-placed insurance after a policy had lapsed, and under what terms. Plaintiff's allegations that Defendants failed to observe reasonable limits in exercising their discretion to force-placing policies at grossly excessive premiums in exchange for kickbacks from the insurance carriers fully states a claim for breach of the covenant of good faith and fair dealing.

Martorella v. Deutsche Bank National Trust Co., 2013 WL 1137514 *6 (S.D. Fla. March 18, 2013). 

          Parenthetically, the Court held that the Defendants' attempt to have class action allegations 'dismissed' was inappropriate for resolution in a case where the class was not yet certified and the Plaintiffs have not even filed a Motion to Certify the Class.  The Court declined to determine class certification "at this time."  Martorella v. Deutsche Bank National Trust Co., 2013 WL 1137514 *8 (S.D. Fla. March 18, 2013). 

          See, in addition, Karen Freifeld and Ashutosh Pandey, "UPDATE 4--Assurant Settles With New York Over 'Force-Placed' Insurance" (Reuters Online, posted Thursday, March 21, 2013):  "Assurant, the country's largest force-placed insurer, is the first to settle an industry-wide probe launched in October 2011 by DFS, New York state's insurance regulator....  In the United States, the force-placed homeowner's market  is dominated by Assurant and Australian insurer QBE."

 The Wages of Sin May Be Paying Attorney's Fees and Indemnity.

          There is a newspaper report on the troubles faced by the common Defendants in increasing litigation expenses caused by the Great Recession, including Force-Placed Insurance lawsuits -- featuring the very same Deutsche Bank that is the first-named Defendant in the Martorella case analyzed in this article.

          Reportedly, Deutsche Bank is required to set aside reserves, or "provisions," in order to cover litigation expenses such as its own attorney's fees and indemnity payments for settlements and judgments.  Its current "provisions" for litigation are ten (10) times greater than the entire net profit Deutsche Bank declared last year, or 2,400,000,000 (2 Billion, 400 Million) Euros which are currently set aside by Deutsche Bank as litigation provisions as compared with 237,000,000 (237 Million) Euros in declared Deutsche Bank profit in 2012.

          Deutsche Bank is reportedly required to "provision for legal liability" when it reaches a "reasonable certainty on timing and amounts of potential verdicts or settlements."  The litigation in which Deutsche Bank is involved includes Force-Placed Insurance Cases, as we have seen in this article today, and other litigation involving, for example, allegations and claims over Deutsche Bank's alleged involvement with Mortgage Backed Securities (MBS's) and manipulation of interest rates.  See Laura Stevens and Ulrike Dauer, "Deutsche Bank's Legal Bill Mounts" p. C1, col. 6 (Wall Street Journal, Thursday, March 21, 2013)(subscription required by the Wall Street Journal to access online).

Please Read The Disclaimer.

Related articles

FAIR DEALING: THE LAW ALREADY GOT THERE. Update: MORE IS NEEDED.

Force-Placed Insurance Issues in New York: Your State, Too.

Force Placed Insurance and the Duty of Good Faith.

Fair Dealing: The Law Already Got There. More is Needed.

Force-Placed Insurance vs. Implied Covenant of Good Faith, Fair Dealing

    Forcing the placement of insurance may be allowed by mortgage contracts.  The way in which the insurance is placed, however, has come under very close scrutiny recently.

    In an increasing number of cases, mortgagors are alleging claims associated with the forced placement of insurance by lenders.  These  claims often include claims based upon alleged breach of the implied covenant of good faith and fair dealing.  The implied covenant at issue in these cases is generally if not always the implied covenant of good faith and fair dealing which is implied in all contracts. This is very different from the basis for imposing the duties of Good Faith and Fair Dealing which are at issue in cases of alleged insurer bad faith. 

    In the cases which present claims resulting from force-placed or lender-placed insurance in the mortgage context, the implied covenant of good faith and fair dealing claims are frequently targeted by lenders with the argument that a Court should not entertain a claim for alleged breach of the implied covenant if there is an express contract between the parties.  These defendants argue that the mortgagors' alleged implied covenant claims ought to be subject to the ordinary rule that where there is an express contract between the parties, the rights and duties between them should be governed by their contract.

    This argument is not ordinarily found, if ever it is found, in cases of alleged insurance bad faith.  There is a good reason for that:  Courts imply what they term Insurers' duties of Good Faith and Fair Dealing because the Courts have deemed the Carriers' Insurance Policy Contracts  to be legally inadequate to provide redress to injured Policyholders and third parties allegedly harmed by 'Bad Faith' and Unfair Dealing in the Insurance Carriers' handling and negotiating settlement of claims.  See generally Dennis J. Wall, Litigation and Prevention of Insurer Bad Faith (Third Edition West Publishing Co., 2013 Supplement in process).

To be Continued ....

Please Read The Disclaimer.

 

MASSACHUSETTS BAD FAITH LAW, FEDERAL CLASS ACTION, FORCE-PLACED FLOOD INSURANCE.

This article is part of a series begun here on Sunday, November 11, 2012, "Two Decisions on Bad Faith and Force-Placed Insurance."  The series continued here on Tuesday, November 13, 2012 with "NEW JERSEY BAD FAITH LAW, FEDERAL CLASS ACTION, FORCE-PLACED FLOOD INSURANCE."

    The second of the two class actions involves Massachusetts law:  Lass v. Bank of America ["BOA"], 695 F.3d 129, 132 (1st Cir. September 21, 2012).

THE Lass FEDERAL CLASS ACTION:  FORCE-PLACED FLOOD INSURANCE AND MASSACHUSETTS BAD FAITH LAW.

    The Lass case involved similar allegations as were alleged in the operative Complaint under New Jersey law in the Kolbe case, also in a class action, this one against a Lender and its Mortgage Servicer.  It was held in the Lass case that under Massachusetts law the operative Complaint stated Bad Faith Claims upon which relief could be granted against both Defendants here.

    The Mortgage is a “standard form” issued by Freddie Mac and Fannie Mae “for single-family mortgages in Massachusetts.”

    The form mortgage contract put at issue by Ms. Susan Lass here, specifically required the Borrower to have hazard Insurance against “floods or flooding, for which Lender requires insurance.”  In other words, the Mortgagor-Borrower contractually agreed to obtain hazard Insurance against floods or flooding, at the Lender’s discretion.

    At the time of closing  -- which was in 1994   -- the Lender did require Flood Insurance.  The amount, however, “was specified in a separate document labeled ‘Flood Insurance Notification’ (‘the Notification’).”  The Notification specified that the amount of Flood Insurance would be the amount of the principal of the mortgage, “or the maximum amount available, whichever is less.”  The amount of Flood Insurance was then the amount of the principal, or $40,000.00.  Lass v. BOA, 695 F.3d 129, 132 (1st Cir. 2012).

NOW, THE REST OF THE STORY, AS THEY SAY.  Lass v. BOA, 695 F.3d 129, 132-33 (1st Cir. 2012).

    Ms. Lass maintained at least the required policy limits of $40,000.00 in Flood Insurance on her Property continously since 1994, except that after a time she increased the Coverage to $100,000.00.

    Until a new Lender acquired the rights to Ms. Lass’s mortgage.

    Then, the Lender (BOA) told her “that she needed an additional $145,086.00” in Flood Coverage which would be the “replacement value,” or the Lender would force-place the Flood Insurance and send her the Premium.

    Lass declined, BOA purchased new Flood Insurance 3 times in 14 months, billed Lass each time, a TV station aired the story, and BOA ‘refunded’ Lass 2 of the 3 Premiums. 

    Susan Lass sued anyway.

THE HOLDINGS OF MASSACHUSETTS BAD FAITH LAW IN THE Lass FORCE-PLACED FLOOD INSURANCE CLASS ACTION.

    The First Circuit held that Ms. Lass stated claims upon which relief can be granted under Massachusetts Bad Faith law in this case, including:

1. The Lender demanded more Flood Insurance than required by Federal law or by the Mortgage.
2. The Lender in this case “backdated” insurance and charged Lass for it.
3. The Lender charged Lass and other “borrowers for commissions or ‘other compensation’ for itself or its affiliates.”

Lass v. BOA, 695 F.3d 129, 138-40 & 139 n.19 (1st Cir. 2012).

JUDGES DECIDE LAWSUITS, NOT QUESTIONS WHICH YOUR MOTHER AND FATHER MAY HAVE DECIDED FOR YOU BACK IN THE DAY.

As in the Kolbe case decided under New Jersey Bad Faith law by the First Circuit in a 2-to-1 decision issued on the same day, the First Circuit in Lass did not see addressing the arguments for and against purchasing Flood Insurance as a part of its job, whether before or after flooding.  That is not a part of the Judges' job description.  Instead, the First Circuit focused on what the contract documents and the law applicable to them authorized and whether the law of the forum State -- which in Lass was Massachusetts, whereas in Kolbe it was New Jersey -- as applied to what the law and the contract documents authorized, additionally authorized a Claim or Claims upon which relief could be granted for Bad Faith.  These two cases being Federal Class Actions, the holdings that the respective Complaints stated Bad Faith Claims upon which relief could be granted, resonates far beyond the relief thereby afforded to Ms. Lass and to Mr. Kolbe.

Dennis Wall is a featured speaker at this year's National Forum on Bad Faith Litigation in Orlando, Florida on November 28 and 29, 2012.  Readers of this blog can receive a discount on registration through I believe November 15, 2012 it is, by mentioning my name as a Speaker at this Forum at the time of registration.  Here is the American Conference Institute's website:  www.americanconference.com/badfaith.

Please Read The Disclaimer.

NEW JERSEY BAD FAITH LAW, FEDERAL CLASS ACTION, FORCE-PLACED FLOOD INSURANCE.

This article continues a series begun here on Sunday, November 11, 2012, "Two Decisions on Bad Faith and Force-Placed Flood Insurance."

     One of the two class actions involves New Jersey law:  Kolbe v. BAC Home Loans Servicing, LP d/b/a Bank of America, 695 F.3d 111 (1st Cir. September 21, 2012).

 THE Kolbe FEDERAL CLASS ACTION:  FORCE-PLACED FLOOD INSURANCE AND NEW JERSEY BAD FAITH LAW.

      In Kolbe, Mr. Kolbe sued his mortgagee and the mortgagee’s subsidiary Insurer.  Mr. Kolbe’s mortgage loan is guaranteed by FHA and tracks the FHA’s Model Mortgage Form for single-family homes.

    The Form provides, in pertinent part, that the Borrower-Mortgagor shall keep Insurance “against any hazards, casualties, and contingencies, including fire, for which Lender shall require insurance,” and in amounts that the Lender requires.

     “[A]lso,” the Borrower shall insure “against loss by floods to the extent required” by HUD.  Kolbe v. BAC Home Loans etc., 695 F.3d 111, 114 (1st Cir. 2012).  [Emphasis added.]

    Bank of America took over Mr. Kolbe’s loan.  Through its insurance subsidiary, BOA sent Kolbe notices that purported to require additional Flood Insurance, at Kolbe’s expense, or BOA would force-place the Flood Insurance at Kolbe’s expense.

    Mr. Kolbe “bought the additional $46,000 in flood insurance.”  Kolbe v. BAC Home Loans Servicing, LP, etc., 695 F.3d 111, 115 (1st Cir. 2012).   Then Mr. Kolbe sued.  Among the Claims he alleged were Claims for alleged Bad Faith.  Further, he brought all his Claims as a class action.

    Mr. Kolbe filed a class action alleging, among other things, that BOA and its Insurance subsidiary, Balboa, breached the mortgage contract’s implied covenant of Good Faith and Fair Dealing, including by:

1. Increasing the Coverage without authorization in the contract.
2. Implementing a national policy “of compelling borrowers to maintain greater flood insurance than required by their mortgages or federal law.”
3. Profiting “from this improper policy” by force-placing the Insurance “through its own affiliated companies and brokers.”

Kolbe v. BAC Home Loans Servicing, LP, etc., 695 F.3d 111, 115 (1st Cir. 2012).

 JUDGES DECIDE LAWSUITS, NOT LEGISLATIVE POLICIES.

     What was not at issue in this Court case, however, was the question whether obtaining higher limits of Flood Insurance Coverage was a good decision.

    The First Circuit acknowledged “that lenders may have good reason to require full replacement coverage” and thus to seek increased Flood Insurance limits accordingly, but that Congress appears to have reached a different policy conclusion in this regard.

    “The question, of course, is not what amount of flood insurance a lender reasonably could require, but what this particular HUD mortgage provision in fact permits the lender to demand.”  Kolbe v. BAC Home Loans Servicing, LP, etc., 695 F.3d 111, 121 (1st Cir. 2012).  [Emphasis added.]

 THE HOLDINGS OF NEW JERSEY BAD FAITH LAW IN THE Kolbe FORCE-PLACED FLOOD INSURANCE CLASS ACTION.

    The First Circuit read the Mortgage together with the HUD requirements in this case, and found an ambiguity which, if the allegation stood alone that the Lender did not have authority to demand increased Coverage, would not have given rise to an actionable Bad Faith claim.  However, the other allegations stated Bad Faith claims upon which relief could be granted under New Jersey law, the First Circuit held:

1. The “ultimatum” that if Kolbe did not buy the increased Coverage, the Lender would do so, and then send Kolbe the bill.
2. The “ultimatum” could also constitute actionable Bad Faith if the Lender knew “yet seized upon the ambiguity as a money-making opportunity.”

Kolbe v. BAC Home Loans Servicing, LP, etc., 695 F.3d 111, 123 (1st Cir. 2012).

The amended complaint stood dismissed as against Balboa Insurance, however, because there were no allegations “showing a contractual relationship between Kolbe and Balboa”.  Id. at 125.

To be continued ....

Dennis Wall is a featured speaker at this year's National Forum on Bad Faith Litigation in Orlando, Florida on November 28 and 29, 2012.  Readers of this blog can receive a discount on registration through I believe November 15, 2012 it is, by mentioning my name as a Speaker at this Forum at the time of registration.  Here is the American Conference Institute's website:  www.americanconference.com/badfaith.

Please Read The Disclaimer.

Related articles

TWO DECISIONS ON BAD FAITH AND FORCE-PLACED Flood INSURANCE.

Massachusetts Bad Faith Law, Federal Class Action, Force-placed Flood Insurance.

Florida Bad Faith Litigation Workshop Discussion.

The Pitch: Forced Insurance Fastball. Comment and YOU MAKE THE CALL.

    Fannie Mae is dealing with force placed Insurance.  That is Insurance under a contract provision that confers the power on a Lender to place Insurance on a Home or other collateral at the expense of a Mortgagor-Borrower.

    The typical contract provision applies where the Mortgagor-Borrower has not kept up with Insurance payments on the  Mortgagor's Home.  Recently force placed insurance has caught attention for reported abuses in which such Insurance has been forced upon Homeowners who are not delinquent in paying their own Homeowner's Policy Premiums, or in which such Insurance has been placed by mortgage servicers with companies which which they, the mortgage servicers, allegedly have a financial relationship involving their receipt of a percentage of the new Premium money.

    Fannie Mae has adopted "new mortgage servicer guidelines" based on an inherent recognition of a special relationship between the Lender-Mortgagee and the Borrower-Mortgagor under a contract that confers a "force-placed Insurance" power on the Lender-Mortgagee.  Download Fannie Mae Mortgage Servicer Guidelines.svc1204.

    The Courts have applied a developing recognition of many kinds of "special relationships" in which one party reposes special confidence or trust in another party.  These special relationships, like the one recognized by Fannie Mae's new mortgage servicer guidelines, have drawn the law's special attention because of the potential for abuse by the party with the power in such relationships, and the terribly damaging effects on the weaker party when that abuse occurs.  See generally 1 Dennis J. Wall, "Litigation and Prevention of Insurer Bad Faith" §§ 3:31 - 3:35 (Third Edition 2011, 2012 Supplement West Publishing Co.).

    Viewed in that light, the basic provisions of the new mortgage servicer guidelines make perfect sense.  They include:

• It is in the Mortgagor's-Borrower's best interest to keep the pre-existing Insurance in place whenever possible and the mortgage servicer is required to act in ways designed to accomplish that result:  The mortgage servicer is required to keep the Mortgagee's-Borrower's own Homeowner's Insurance Policy in effect if at all possible, "even if that means advancing money to cover the past-due premium."
• Disclosure:  The mortgage servicer is required by Fannie Mae's new guidelines to contact the Mortgagee-Borrower at least two times and inform them that there is a greater Premium involved in force-placed Insurance (which will be added to the monthly Mortgage payment whether the Borrower likes it or not), and that the force-placed substitute will provide Insurance Coverage only for the structure, not the contents of the home.
• Reimbursement:  The mortgage servicer is also required by the new guidelines to refund Premiums on canceled policies to Borrowers who themselves find and pay for the contracted Insurance "within 15 days of receiving evidence of other coverage."

Lisa Prevost, "Mortgages / The High Price of 'Forced' Insurance" (New York Times Online, posted and published Thursday, October 4, 2012).

    Here is where you come in, good reader.  The Consumer Financial Protection Bureau has pursued and is pursuing seven of what it calls "rulemakings" with related requirements on this issue.  Most of these "rulemakings" generally take effect on January 21, 2013 says the CFPB, but two have Comment Periods which close on Tuesday, October 9, 2012.  Here are links to both and to hyperlink portals through which you can leave your Comments as you may wish:  2012 Truth in Lending Act (Regulation Z) Mortgage Servicing and although both relate to the issue, the more pertinent as between the two proposed regulations: 2012 Real Estate Settlement Procedures Act (Regulation X) Mortgage Servicing Proposal.

    Act now.  This is the time of year when Major League Baseball teams are in the playoffs and Umpires are there making the call.  This is your chance to Comment and Make the Call on something that is more important even than baseball to all the Mortgagors and Mortgagees who are caught in the Hephaistos chain of force placed insurance.

Please Read The Disclaimer.

FAIR DEALING: THE LAW ALREADY GOT THERE. Update: MORE IS NEEDED.

Not From the Law.  From the Lawyers.  This is an update to the post here on Tuesday, August 14, 2012.

         As was noted in the previous post, much has been written about Municipal Bond Insurance and related matters including issues involved in bond issuance.  See in addition posts here and especially under the category of Bond Insurance addressing the roles of duties of Good Faith and Fair Dealing in this arena.  The previous post in particular addressed duties of Fair Dealing in agency rules and regulations. 

          It turns out that there is a higher authority in place.  By Act of Congress, municipal advisers are "fiduciaries".    The statute's effect is that municipal advisers owe an undivided loyalty not simply to investors but to issuers of municipal securities, really, to so-called "munis" (municipalities, school boards, water management districts, and so on) in their issuance of bonds to finance things like municipal wastewater projects, sewers, schools, and other local community projects.

          The statute, to say again, has been passed.  The Act of Congress in question is known as the Dodd-Frank Act.  As it is wont to do, Congress left it to regulatory bodies to define key words and phrases in rules and regulations.  One of those key words is "fiduciaries".

          The Municipal Securities Rulemaking Board was given jurisdiction by Congress to propose the necessary rules.  The Board duly proposed that its preexisting "fair dealing" rule be expanded to require securities underwriters "to make sure local officials understand the risks of complex  bond deals, and to disclose any incentives they may have for supporting certain transactions."  Mary Williams Walsh, "Municipal Bond Rule Mired in Legislative Limbo" p. B1, col. 4 (New York Times Nat'l ed., "Business Day" Section, Tuesday, August 14, 2012).   The Securities and Exchange Commission is required to approve rules promulgated by the Municipal Securities Rulemaking Board, and the SEC approved this proposed rule change by a vote of 3-to-2.

          The two dissenters in the SEC were the only two Republicans who sit on the SEC.  Although their dissent is reported in the linked newspaper article, the fact that they are the only Republicans on the SEC is not reported there.  That fact is reported here. 

          So far so good.

          Then the proposed rule change, and the provision of the Dodd-Frank Act which authorizes the change in the first place, was attacked by a bill filed by a Republican Congressman which was finally reported out of a House Subcommittee just as Congress recessed.  The bill would eliminate the provision of the Dodd-Frank Act that municipal advisers should be treated as fiduciaries in the issuance of securities by munis.

          When the House of Representatives (finally) returns to work in September, more argument, er, debate is expected.  One of the debates left hanging is a proposal by banks that they should be excluded from the rule definition of "fiduciaries," even though in reality "bankers often do advise municipalities."  Mary Williams Walsh, "Municipal Bond Rule Mired in Legislative Limbo" p. B1, col. 4 (New York Times Nat'l ed., "Business Day" Section, Tuesday, August 14, 2012).

          Apropos of the observation in Tuesday's article that "the Securities and Exchange Commission seems to be overloaded with George W. Bush-era political appointees who still see their mission as doing nothing so that others can accuse the Federal Government of not acting":  The SEC reportedly settled another subprime mortgage investigation for pennies on the dollar, rather than trying the case.  This settlement was with Wells Fargo for less than the cost of doing business:  4/100 or 1/25 of one percent of its earnings last year.  Just a few days ago, the SEC announced for the first time in recorded history, or just about, that it, the SEC, was not going to pursue criminal charges against Goldman Sachs.  See Ben Protess, "Wells Fargo Settles a Securities Case" p. B7, col. 1 (New York Times Nat'l ed., "Business Day" Section, Wednesday, August 15, 2012).  The SEC is not the place to go for Fair Dealing, it seems.

          Note to Mary Schapiro, the current Chair of the SEC:  You get good press.  Why?  It is because of who you are -- or who you are not, and not what because of what you do.  You are not your predecessor.  All in all, that is not much but it is something. 

Please Read The Disclaimer.

Fair Dealing: The Law Already Got There. More is Needed.

    Much has been written about Municipal Bond Insurance.  That includes posts here and especially under the category of Bond Insurance which address the need for enforcement of duties of Good Faith and Fair Dealing in this arena.

    Now comes news that "fair-dealing rules" have been in place "for decades" in the municipal bond market.  "Rules requiring fairness in this market state that participants must not be deceptive, dishonest or unfair in their practices.  The regulations apply to the sale of municipal bonds to investors and to underwriters' interactions with issuers; fraud need not be alleged in a fair-dealing case."  Gretchen Morgenson, "Fair Game / Police Protection, Please, for Municipal Bonds" p. 1, col. 1 (New York Times Nat'l ed., "SundayBusiness" Section, Sunday, August 5, 2012).

    From recent news coverage it is clear that at least certain firms and individuals who make their money from Wall Street, have taken advantage of relatively less financially sophisticated school board members or water management district board members, for example.  Even so, the Securities and Exchange Commission seems to be overloaded with George W. Bush-era political appointees who still see their mission as doing nothing so that others can accuse the Federal Government of not acting.  The SEC has recently asked for more power to enforce regulations in the municipal bond market while ignoring the regulations that have existed for almost as long as the SEC itself.  This is perhaps an exaggeration, but only a slight one.

    This is an area deserving of research.  "So far, the commission's reticence to act on behalf of municipal issuers has left those issuers to take on Wall Street alone.  Few have done so."  Gretchen Morgenson, "Fair Game / Police Protection, Please, for Municipal Bonds" p. 1, col. 1 (New York Times Nat'l ed., "SundayBusiness" Section, Sunday, August 5, 2012).

    There does not seem to be a similar impediment to lawsuits involving allegedly failed advice to munis when they are investors rather than issuers.  The City of St. Petersburg is one example.  The City successfully sued for over $10 Million in a case involving alleged failure or unfair dealing in financial advice to the City on an investment.  See "Bad Faith Financial Services:  No Comparative Negligence in Lawsuit," posted on April 5, 2012.

    This area is worth taking time to research the law so that the law may be applied.

    It is worth your time, too.

 Please Read The Disclaimer.

    

    

Force-Placed Insurance Issues in New York: Your State, Too.

     The New York State Department of Financial Services has issued an order to three Insurance Companies to submit new Premium rates for force-placed Insurance, because the companies overcharged millions of dollars for it.  The three companies have until July 6, 2012 to respond.  The companies receiving the order are Assurant (a unit of American Security Insurance Company), QBE, and American Modern Home Insurance Company.  These three companies "make up more than 90 percent of the so-called force-placed insurance market in New York."  Zachary Tracer, "New York Asks Insurers of Lapsed Borrowers for New Rates" (Bloomberg.com, posted June 12, 2012).

    Other reports previously estimated that Assurant and QBE alone control about 90 percent of the force-placed insurance market in New York State.  See "Forced-Placed Insurance Under Investigation," posted here on May 22, 2012.     

    And here is a link to the New York State Department of Financial Services' Press Release announcing this action and the requirement that responses must be submitted by July 6, 2012:  Press Release, "Governor Cuomo Announces DFS Action Could Save Some New York Homeowners Millions in Overcharges to Home Insurance," June 12, 2012.

    Do not think that the issues of force-placed Insurance belong only to New York State.  The issues of force-placed Insurance apply across the nation.  The issues include Premium charges, forced placement of Insurance selected by the Lenders and their Mortgage Servicers when homeowners are not actually in default in carrying the Insurance which the homeowners selected, and issues involving an implied covenant of Good Faith and Fair Dealing not only by the Force-Placed Insurance Companies, but allegedly by Banks, Lenders, and Mortgage Servicers too.  See, e.g., "Force Placed Insurance and the Duty of Good Faith," posted here on June 12, 2012; "Good Faith in Lender-Placed Insurance?" posted here on April 12, 2012. 

Please Read The Disclaimer.

Good Faith in Lender-Placed Insurance?

    Force-placed Insurance is also known as lender-placed Insurance.  The right to place Insurance is a right borrowers give up by contract.  If borrowers fail to keep Insurance in place on mortgaged property, they give lenders the right to place Insurance on the property and send the Premium bill to the borrowers.

    There are apparent problems in practice with how lenders exercise lender-placed Insurance rights.  At least in New York State, there is reported evidence of scams to direct placement of that Insurance to selected companies for higher Premiums.  Sometimes, there is evidence of kickbacks and added fees for Reinsurance to protect these Insurance Companies but not the borrowers of course, in New York State.  See Liz Rappaport and Leslie Scism, "Insurers Facing Greater Scrutiny" p. C1, col.6 (Wall Street Journal, Thursday, April 5, 2012).

    Although there is a reported ongoing investigation of underway in New York State, the exposure of Insurance Companies issuing the lender-placed Insurance is said to be particularly high in Florida in part because of the high number of Florida Foreclosures.  Id.

    If a borrower gives up a right to place Insurance on mortgaged property, it seems that at least arguably, lenders should, do or may have a corresponding Fiduciary duty of Good Faith in the exercise of that right and to Deal Fairly with the borrower who not only has given up the right exercised by the lender, but pays the bill for the Insurance product selected by the lender.

Please Read The Disclaimer.

HEALTH INSURANCE: MORE ON "FORCE PLACED INSURANCE" ...

... Herein of its profitable performance as a financial planning tool for lenders, its lack of deductibles, and its effects on Fiduciary Relations.  This updates the post here on January 15, 2012.

    In addition to the many features of "force placed" or "forced place" Insurance that were addressed in a post here last week, force placed Insurance also has these prominent features as well:

1. At this time, it generates $6 Billion annually, or $6,000,000,000.00 a year.  It has grown 6 times in recent years, largely at the expense of Homeowners.
2. "[L]ender-placed insurance" is strictly for the benefit of Lenders.  Homeowners are not protected by it and there is ordinarily no Deductible.
3. Lenders of course are the ones who require Borrowers-Homeowners to agree that Lenders can force the placement of Insurance to protect the Lenders' interests.  A Lender's Mortgage Servicer may be, and often is, connected or affiliated with the Insurance Company which issues the force placed Policy.  The Mortgage Servicer may not disclose the conflict of interest in that situation and, if there is a loss, the Mortgage Servicer may be reluctant to submit a Claim to its affiliate, the Insurance Carrier which issued the force placed Insurance.  In the meantime, the Homeowner of course is charged for the high Premium and, if the Homeowner cannot pay that Premium, the Lender frequently forecloses -- paying the Lender's Mortgage Servicer to bring the Foreclosure proceedings.

See  Gretchen Morgenson, "Fair Game / Hazard Insurance With Its Own Perils" p. 1, col. 1 (New York Times Nat'l ed., "SundayBusiness" Section, Sunday, January 22, 2012).   "Mind you, force-placed policies do not protect homeowners from loss.  Only lenders are covered.  But homeowners must pray the freight."  Id.

 Please Read The Disclaimer.

Investigation: Possible Bad Faith in Forced Placement of Homeowner's Insurance.

   I had to look this up myself.  "Force placed insurance" is also known as "forced place insurance".  Basically, it is Insurance which is forced into place.

   The right to force Insurance upon another person is a right generally given up by a debtor to a creditor.  The creditor obtains the right to force Insurance upon the debtor in order to protect the creditor's asset in a transaction.  A simple and familiar example of such a situation is a Mortgagee's loan of money to a Mortgagor to buy or remain in a house or home.  Ordinarily the Mortgagee obtains the right to protect the 'asset' of the house when the Mortgagor fails to protect that asset as the Mortgagor contractually agreed to do, such as by failing to make the Premium payments on a Homeowner's Insurance Policy.

   Mortgagees and their supposed agents or assignees (often, "Mortgage Servicers") to which the right to place Homeowner's Insurance by force is given, are currently under investigation beginning in New York State.  See Louise Story, "Big Banks Face Inquiry Over Home Insurance" p. B1, col. 6 (New York Times Nat'l ed., "Business Day" Section, Wed., January 11, 2012).

   The forcers of Homeowner's Insurance placement are under investigation for allegedly using chosen high-priced purveyors of Homeowner's Insurance, from whom they may or may not get a kickback or with whom they may have an ongoing relationship such as belonging to the same parent corporation.  Such are the allegations under investigation at any rate.  See id.

   "Where there's a will, there's a way."  In the current Financial Fiasco through which we are all now living, where there's a way to make a buck, there seems to be a will to do it.  Good Faith, Bad Faith, no faith.  The end result is forced place (or force placed) Insurance.  It matters a great deal to the Mortgagor whether forced place Insurance is done in Good Faith, or not:  It is already certain that higher Premiums will be charged whenever Insurance is forced into place, and that is enough.  Mortgagors should not also be made to pay an even greater increase in Premiums for Bad Faith.  Time and the New York investigations may begin to tell, starting now.

Please Read The Disclaimer.  

Today is Dr. Martin Luther King, Jr.'s Birthday.  Tomorrow we will observe his birth as a national holiday.  Thank the Good Lord for him and for many other great Americans like him.  Without them, we would be less than what we are as a country.  With them, we became greater than what we were as a country.