The lending industry’s troubles with a controversial type of insurance coverage appear to be spreading to new areas. In recent weeks New York State’s Department of Financial Services has issued subpoenas to more than 20 mortgage servicers, a dozen insurers and 20 affiliated insurance agencies, according to someone familiar with the investigation.
The state officials are seeking information about force-place property insurance that banks purchase on behalf of uninsured borrowers. Force-placed insurance is a type of coverage that protects creditors in the event an uninsured borrower’s property is damaged.
It’s big business. One large insurer, Assurant Inc. receives around $2 billion in annual premiums, and banks are paid commissions on the policies.
The New York Times and other media outlets have previously reported the existence of the probe by New York’s DFS, a merged banking and insurance regulator headed by Commissioner Benjamin Lawsky.
However, the full list of companies that have been sent subpoenas, unreleased until now, indicates that the state investigation is broader than simply force-placed insurance on homes. The list includes a number of bank subsidiaries that also handle force-placed auto insurance and REO insurance, a costly form of coverage placed on foreclosed homes and billed to mortgage bond investors.
New York’s DFS declined comment.
A person familiar with the investigation said that force-placed auto insurance and post-foreclosure insurance are among the subjects of the probe.
Force-placed insurance, by itself, is not controversial; because investors are at risk if property is damaged, borrowers are required to maintain insurance coverage. If they fail to do so, the servicer handling the loan customarily buys coverage for them.
Consumer advocates and mortgage bond investors allege banks have corrupted the process by demanding that insurers share their premium revenues — an arrangement critics claim is a form of pay-for-play. Force-placed insurance can be 10 times more expensive than voluntarily purchased policies, American Banker has reported. What’s more, one large insurer, QBE, has set up its business in key markets in a way that exempts it from state price caps on insurance. It declined comment when originally contacted about the arrangement.
“This is clearly not in the investors’ interest,” Amherst Securities analyst Laurie Goodman previously told American Banker about force-placed policies. “Servicers are getting a huge chunk of money from force-placed insurance, and investors pay for it through higher loss severity at the liquidation of the loan.” (American Banker is a sister publication to National Mortgage News.)
New York’s DFS has sent subpoenas to at least four separate subsidiaries of Wells Fargo and three divisions of JPMorgan Chase Co. The variety of entities being subpoenaed suggests New York is looking at whether deals among insurers, banks and banks’ affiliated insurance agencies were truly conducted at arm’s length. Both Wells and Chase declined to comment.
Many entities the DFS is looking at already face related class actions over force-placed insurance. At JPMorgan Chase Co., employees stated in a class action deposition that a bank insurance subsidiary, Chase Insurance Agency Inc., collected tens of millions of dollars in commissions from flood insurance — yet the agency did not employ a single insurance agent. The bank settled the class action for more than $10 million.
“What function does Chase Insurance Agency, Inc. perform with respect to flood insurance?” a plaintiffs’ attorney asked a Chase employee during a deposition.
“I would say no function,” Chase’s employee responded.
For a full list of the entities to which New York State’s DFS has sent subpoenas, click here.