Ties to Insurers Could Land Mortgage Servicers in More Trouble

Hat tip Naked Capitalism links

The insurance industry just seems to get demolished by the Wall Street Bankers.

In the American Banker, by Jeff Horwitz

Evidence of abuses and self-dealing in the force-placed insurance industry suggests that there may be far larger problems in how servicers are handling distressed loans than the sloppy document recording that has been the recent focus of industry woes.

Behind banks’ servicing insurance practices lie conflicts of interest that align servicers and their insurer partners against borrowers and investors. Bank of America Corp. owns a force-placed insurance subsidiary, and most other major servicers receive commissions or reinsurance fees on the very same policies they purchase on investors’ and borrowers’ behalf.

“There’s no arm’s-length transaction here, and that creates all sorts of incentives for the servicer to force-place excessive insurance and overcharge consumers for policies that provide minimal benefit,” said Diane Thompson, of counsel for the National Consumer Law Center. “Servicers and insurers have turned this into a gravy train.”

Sometimes the arrangements resemble simple kickbacks: Court documents show that a subsidiary of the country’s largest specialty insurer paid undisclosed “commissions” for the rights to a servicer’s force-placed business.

State court filings show alleged abuse in which banks charged borrowers for unnecessary insurance and backdated policies providing coverage retroactively. Often the insurance was acquired only after banks stopped advancing the premiums of delinquent borrowers’ escrowed policies, causing those cheaper and more comprehensive policies to expire. In response to questions from American Banker, federal and state officials said that some practices that industry trade groups defend may not be legal.

“It is clear that [the Real Estate Settlement Procedures Act] prohibits fee splitting and unearned fees for services that are not performed,” said Brian Sullivan, spokesman for the Department of Housing and Urban Development. Foreclosure defense and legal aid attorneys say force-placed insurance is found on most of the severely delinquent loans in this country. If so, the cost to investors may well be in the billions of dollars.

 It is not likely that this was the original intent of these practices.  The original intent, no doubt, was to stick it to the occasional delinquent householder:  Someone without enough resources to take issue with the matter.  After all, while I am sure Mr. Hurwitz is a fine reporter, someone very likely tipped him to the story.

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