OFAC Announces Settlement Agreement with Insurance Company

On August 6, OFAC announced a $271,815 settlement with a New York-based insurance company with an overall focus on marine insurance and related lines of business, professional liability insurance, and commercial umbrella and primary and excess casualty businesses. According to OFAC, from May 8, 2008 to April 1, 2011, the company and its London branch office, “issued global protection and indemnity (“P&I”) insurance policies that provided coverage to North Korean-flagged vessels and covered incidents that occurred in or involved Iran, Sudan, or Cuba—some of which led to the payment of claims.” The company’s willingness to engage with OFAC-sanctioned countries resulted in 48 alleged violations of Foreign Assets Control Regulations, Executive Order 13466 of June 26, 2008, North Korea Sanctions Regulations, Iranian Transactions and Sanctions Regulations, Sudanese Sanctions Regulations, and Cuban Asset Control Regulations. OFAC stated that (i) the company did not maintain a formal compliance program at the time it issued the P&I insurance policies; and (ii) the company’s London office personnel “misinterpreted the applicability of OFAC sanctions regulations.” The final settlement amount reflects the fact that managers and supervisors knew or had reason to know that the majority of the insurance policies and claims payments at issue involved OFAC-sanctioned countries; the company is a commercially sophisticated financial institution; and it did not have a formal OFAC compliance program in place at the time the apparent violations occurred. Mitigating factors included the company’s cooperation with OFAC’s investigation; lack of prior enforcement action; and its remedial action plan to implement a sufficient OFAC compliance program.

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CFPB Issues Guidance Reminding Servicers of Requirements for Cancellation and Termination of Private Mortgage Insurance

On August 4, the CFPB issued Compliance Bulletin 2015-03 to provide guidance to mortgage servicers on their compliance obligations related to the private mortgage insurance (PMI) cancellation and termination provisions under the Homeowners Protection Act (HPA). The bulletin summarizes HPA requirements regarding annual disclosures, PMI refunds, borrower-requested cancellation, automatic termination, and final termination of PMI. The bulletin also cautions servicers to implement investor guidelines in a manner that does not violate the HPA. In a statement released by the Bureau, CFPB Director Richard Cordray advised, “We will continue to supervise mortgage servicers to ensure they are treating borrowers fairly, and [the Bureau’s] guidance should help servicers come into compliance with the [HPA].”

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BuckleySandler Secures Second Circuit Victory in Lender-Placed Insurance Rate Case

On July 22, BuckleySandler secured a substantial victory before the United States Court of Appeals for the Second Circuit. Representing a global insurance company in a nationwide lender-placed insurance (“LPI”) class action brought by mortgage borrowers, the Firm argued on interlocutory appeal that the Second Circuit should reverse the district court’s denial of its motion to dismiss on the basis of the “filed-rate” doctrine. Ordinarily, the filed-rate doctrine provides that rates approved by the applicable regulatory agency – including LPI rates – are per se reasonable and unassailable in judicial proceedings brought by ratepayers. The district court, however, held that the plaintiffs’ claims were not barred by the doctrine because, rather than directly billing the plaintiffs for the LPI premiums, the insurance company initially charged the premiums to the plaintiffs’ mortgage servicer who, in turn, charged the borrowers. The Second Circuit reversed the Southern District of New York’s decision, holding that the filed-rate doctrine applied notwithstanding the fact that the mortgage servicer served as an intermediary to pass on the LPI rates to borrowers. Because the plaintiffs’ claims ultimately rested on the premise that the LPI rates approved by the regulators were too high and included impermissible costs, the Second Circuit held that the claims were barred by the filed-rate doctrine.

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New York DFS Announces Targeted Cybersecurity Examinations, Releases Report on Insurance Companies

On February 8, New York DFS Superintendent Benjamin Lawsky announced that the DFS would begin (i) regularly examining insurance companies’ cyber security preparedness; (ii) enhancing regulations that will require insurance providers to meet higher standards of cyber security; and (iii) examining “stronger measures related to the representations and warranties insurance companies receive from third-party vendors.” Lawsky expects the targeted exams to begin in the “coming weeks and months.” The announcement was accompanied by the release of the state agency’s report on cybersecurity in the insurance industry.

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Agencies Propose Flood Insurance Rule

On October 30, five federal agencies – the FCA, FDIC, NCUA, OCC and the Fed – issued a proposed rule regarding flood insurance. The proposed rule will amend regulations relating to loans secured by property located in special flood hazard areas. Specifically, the proposed rule would (i) establish requirements in connection with the escrow of flood insurance payments; (ii) provide certain borrowers with the option to escrow flood insurance premiums and fees; and (iii) eliminate the HFIAA requirement “to purchase flood insurance for a structure that is part of a residential property located in a special flood hazard area if that structure is detached from the primary residential structure and does not also serve as a residence.” Comments on the proposed rule are due by December 29, 2014.

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SDNY Certifies Interlocutory Appeal In Lender-Placed Insurance Dispute

On April 3, the U.S. District Court for the Southern District of New York certified an interlocutory appeal of an order denying a motion to dismiss filed by a group of insurers facing class allegations of unlawful lender-placed insurance practices. Rothstein v. GMAC Mortgage, LLC, No. 12-3412, 2014 WL 1329132 (S.D.N.Y. Apr. 3, 2014). In declining to dismiss the case, the court held, among other things, that the filed rate doctrine did not bar borrowers’ claims because the doctrine applies only where the challenged rate is one imposed directly by an insurer, and does not apply to lender-placed insurance where a third-party—the lender or servicer—acquires the insurance at a filed rate and bills the borrower for the costs. On the insurers’ motion for interlocutory appeal, the court held that the issue of whether the filed rate doctrine applies is a question of law that could be dispositive and for which there is substantial ground for a difference of opinion, and that the potential to avoid protracted litigation warranted certification for appeal. BuckleySandler represents the insurers in this action.

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Fannie Mae, Freddie Mac To Restrict Lender-Placed Insurance Practices

On November 5, the FHFA announced that it had directed Fannie Mae and Freddie Mac to implement new restrictions on lender-placed insurance practices. In March, the FHFA sought comments on certain potential lender-placed insurance restrictions, including new policies to (i) prohibit sellers and servicers from receiving, directly or indirectly, remuneration associated with placing coverage with or maintaining placement with particular insurance providers, and (ii) 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. Following that comment process and related efforts by the FHFA to obtain feedback on these issues, the FHFA now has directed Fannie Mae and Freddie Mac to provide aligned guidance to sellers and servicers to prohibit servicers from being reimbursed for expenses associated with captive reinsurance arrangements. The announcement does not provide any timeline for the new guidance, but states Fannie Mae and Freddie Mac will provide implementation schedules with the new rules.

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C.D. Cal. Denies Class Certification In Lender-Placed Insurance Dispute

On November 4, the United States District Court for the Central District of California denied certification of a putative nationwide class that alleges a mortgage servicer and lender-placed insurance (LPI) companies violated California’s Unfair Competition Law (UCL), breached mortgage contracts, and unjustly enriched themselves by improperly charging and overcharging borrowers for lender-placed insurance. Gustafson v. BAC Home Loans Servicing LP, No. 11-00915, 2013 WL 5911252 (C.D. Cal. Nov. 4, 2013). The court held that the named borrowers could not assert a UCL claim nationwide because (i) the UCL claims fell within the mortgage contracts’ choice-of-law provisions, (ii) there are material differences among the states’ consumer protection laws, (iii) foreign states have an interest in regulating conduct that was carried out, in part, within their borders, and (iv) the last event necessary to make the insurers and servicer liable occurred where the insurance premiums were charged to borrowers in their home states. The court also held that the borrowers failed to meet the commonality and predominance requirements of Rule 23 for both their breach of contract and unjust enrichment claims, in part because laws regarding breach of contract, affirmative defenses, and unjust enrichment vary from state to state. Further, the court explained that the unjust enrichment claim required individualized fact determinations as to whether (i) borrowers who are charged for LPI may either not pay for it, or not pay the full rate, and (ii) individual class members’ circumstances could preclude or reduce recovery. BuckleySandler represents lender-placed insurers in this and other similar actions.

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Seventh Circuit Affirms Dismissal of Lender-Placed Insurance Claims

On November 4, the United States Court of Appeals of the Seventh Circuit affirmed a trial court’s dismissal of allegations that a lender and insurer fraudulently placed insurance on the borrower’s property after the borrower’s homeowner’s policy lapsed. Cohen v. Am. Sec. Ins. Co., No. 11-3422, 2013 WL 5890642 (7th Cir. Nov. 4, 2013). The court held that the borrower’s claim under the Illinois Consumer Fraud and Deceptive Business Practices Act failed because (i) the loan agreement and the lender’s disclosures, notices, and correspondence conclusively defeat any claim of fraud, false promise, concealment, or misrepresentation, (ii) the borrower did not allege an unfair business practice because “there is nothing oppressive or unscrupulous about giving a counterparty the choice to fulfill his contractual duties or be declared in default for failing to do so,” and (ii) “[the lender] was not subject to divided loyalties; rather, it was subject to an undivided loyalty to itself, and it made this clear from the start.” The court also held that the borrower failed to state a breach of contract claim because nothing in the loan agreement and related documents prohibited the lender and its insurance-agency affiliate from receiving a fee or commission for LPI. To the contrary, the court explained, the loan agreement and related notices and disclosures specifically warned the borrower of this possibility. The court also affirmed the dismissal of the borrower’s fraud, conversion, and unjust enrichment claims for failing to state a claim as a matter of law, but on different grounds than the district court. The district court had ruled in favor of the lender and insurer based on federal preemption and the filed rate doctrine. The Seventh Circuit chose not to address those bases for dismissal in its ruling.

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Treasury Fines Foreign Investment Firm Over Iran Sanctions Violations

On October 21, the Treasury Department’s Office of Foreign Assets Control (OFAC) imposed a $1.5 million civil penalty in an enforcement action against a UAE-based investment and advising company for violating the Iranian Transactions and Sanctions Regulations. OFAC determined that the firm recklessly or willfully concealed or omitted information pertaining to $103,283 in funds transfers processed through U.S.-based financial institutions for the benefit of persons in Iran. OFAC determined that the firm’s actions were egregious because (i) it did not voluntarily self-disclose the violations to OFAC, has no OFAC compliance program, and did not cooperate in the investigation, (ii) the firm’s management had actual knowledge or reason to know of the conduct, and (iii) the conduct resulted in potentially significant harm to the U.S. sanctions program against Iran.

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FDIC Cautions Financial Institutions About D&O Insurance Coverage

On October 10, the FDIC released Financial Institution Letter FIL-47-2013 to caution financial institutions about an increase in exclusionary terms or provisions in director and officer (D&O) liability insurance policies purchased by financial institutions. The FDIC reports that insurers are increasingly adding exclusionary language to D&O policies that has the potential to limit coverage and leave officers and directors personally responsible for claims not covered by those policies. Such exclusions may adversely affect financial institutions’ ability to recruit and retain qualified directors and officers. The FDIC advises institutions to thoroughly review the risks associated with coverage exclusions contained in D&O policies. The letter also reminds institutions that FDIC regulations prohibit an insured depository institution or depository institution holding company from purchasing insurance that would be used to pay or reimburse an institution-affiliated party for the cost of any civil money penalties assessed in an administrative proceeding or civil action commenced by any federal banking agency.

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Florida Insurance Regulator Requires Lender-Placed Insurer to Alter Practices, Decrease Rates

On October 8, Florida’s Office of Insurance Regulation announced that it disapproved a lender-placed insurer’s 2013 rate filing and ordered the insurer to decrease its rate by 10%. The regulator also required the insurer to enter a consent order pursuant to which the insurer agreed to submit annual rate filings until further notice and to not engage in certain delineated business practices, including, for example, (i) paying commissions to a mortgage servicer on policies obtained by that servicer, (ii) paying contingent commissions based on underwriting profitability or loss ratios, (iii) issuing policies on mortgaged property serviced by an affiliate, and (iv) issuing reinsurance on policies with a captive insurer of any mortgage servicer.

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House Passes Insurance Licensing Bill

On September 10, the U.S. House of Representatives passed legislation, H.R. 1155, which would amend the Gramm-Leach-Bliley Act to allow for multistate licensing of insurance producers through the establishment of the National Association of Registered Agents and Brokers (NARAB). The bill would authorize NARAB to: (i) establish membership criteria, (ii) deny membership to a state-licensed insurance producer on the basis of the criminal history information obtained, or where the producer has been subject to certain disciplinary action, (iii) receive and investigate consumer complaints and refer any such complaint to the state insurance regulator, and (iv) coordinate with state insurance regulators to establish a central clearinghouse and a national database for the collection of regulatory information concerning the activities of insurance producers. The bill would retain states’ regulatory authority over: (i) licensing, continuing education, and other qualification requirements of non-NARAB producers, (ii) resident or nonresident producer appointment requirements, (iii) supervision and disciplining of such producers, and (iv) setting of licensing fees for insurance producers. States also would remain responsible for consumer protection and market conduct. The bill passed the House last Congress, but never advanced in the Senate.  Earlier this year, the Senate Banking Committee reported a corresponding bill, which is awaiting consideration by the full Senate.

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Illinois Enacts Auto Ancillary Products Bill

On August 9, Illinois enacted HB 1460, which expands the definition of “service contract” in the state’s Insurance Code to include ancillary auto service contracts – e.g. contracts related to the repair or replacement of tires, repair of certain damage to motor vehicles, or that provide for protective systems applied to a vehicle. By expanding the definition, the new law requires any provider of such ancillary products operating in Illinois to register with the Illinois Department of Insurance, pay an annual registration fee, and to designate an individual for service of process. Ancillary auto product providers also will be subject to, among other things, financial requirements, disclosure rules, and record keeping requirements, and will be subject to examination and enforcement by the Illinois Department of Insurance. The changes take effect on January 1, 2014.

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Fair Housing Group Accuses Insurance Company of Redlining

On December 21, the National Fair Housing Alliance (NFHA) announced that it filed with HUD a housing discrimination complaint against a major insurance company regarding the offering of hazard insurance in a certain geographic area. According to the statement filed in support of its complaint, NFHA alleges that the company refuses to underwrite homeowners’ insurance policies for homes that have flat roofs in the Wilmington, Delaware area, a policy that NFHA charges has a racially disparate impact on African-American and minority communities. Although insurance and insurers are not explicitly covered in the Fair Housing Act, NFHA argues that federal courts have given deference to HUD’s interpretation of the statute, holding that the Fair Housing Act applies to all types of discriminatory insurance practices. NFHA’s complaint is based on its own testing of independent insurance agencies and a single university study of the relationship between roof type and race in the Wilmington area. NFHA claims that its testing of six insurance agencies shows that independent insurance agents were willing to underwrite policies on homes with flat roofs, while agents affiliated only with the insurance company targeted by NFHA cited a company policy that disallowed underwriting policies on such homes. Further, NFHA claims that the university study found a statistically significant relationship between minority populations and homes that have flat roofs, and therefore the “no flat roof policy” disproportionately impacts African-American and minority communities. Moreover, NFHA claims that there is no business justification for such a policy and that the insurance company does not apply the same policy in other cities. Under its fair housing complaint procedures HUD will now conduct its own investigation and determine whether further administrative action is required.

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