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.
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.
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.
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.
Recently, the U.S. Court of Appeals for the First Circuit affirmed a district court’s dismissal of a putative class action alleging that a lender improperly required borrowers of FHA-insured mortgages to buy and maintain higher flood insurance coverage than that indicated in their mortgage contracts. Kolbe v. BAC Home Loans Servicing, LP, No. 11-2030, 2013 WL 5394192 (1st Cir. Sept. 27, 2013). The ruling, from an equally divided en banc court, allows mortgage lenders to require borrowers to maintain flood insurance equal to the replacement value of their homes. The named borrower claimed that he was forced to increase his flood insurance coverage in breach of his mortgage contract with his original lender that set the required flood amount coverage. In an amicus brief filed by DOJ on behalf of HUD, the government argued that the FHA’s model mortgage form gives lenders discretion to require coverage for the replacement cost of the property in the event of a flood. The Court of Appeals agreed with the government’s interpretation of the language in the model mortgage contract and reasoned that to interpret the form otherwise would hinder federal housing policy by discouraging banks from offering FHA-insured mortgages or forcing banks to charge higher rates. Dissenting judges argued that the ruling allowed a federal agency to intervene and rewrite a contract to serve its own purposes, and that the ruling’s prediction that banks would not offer FHA mortgages or charge higher rates was speculative.
On September 19, the New York Department of Financial Services (DFS) proposed regulations for the rates for and placement of lender-placed insurance (LPI), and to prohibit certain LPI practices. The proposed regulations, which only would be applicable in New York, largely mirror the relief included in a series of agreements the DFS obtained earlier this year from all of the lender-placed insurers currently operating in New York. For example, the proposed regulations would prohibit insurers, producers, and/or affiliates from: (i) issuing LPI on mortgaged property serviced by an affiliate, (ii) paying commissions to a servicer or a person or entity affiliated with a servicer on LPI policies obtained by the servicer, (iii) paying contingent commissions on LPI based on underwriting profitability or loss ratios, (iv) making payments, including but not limited to the payment of expenses, to a servicer or a person or entity affiliated with a servicer in connection with securing LPI business, and (v) providing free or below cost outsources services to a servicer, person, or entity affiliated with a servicer other than practices associated with tracking functions that an insurer or its affiliate perform for the insurers’ own benefit. The regulations also would, among other things, (i) require insurers to file LPI premium rates with a permissible loss ratio of at least 62% with certain reporting and refiling requirements, (ii) establish requirements regarding the sufficiency of demonstrating voluntary coverage and provide for 15 days to make any associated refund, and (iii) establish requirements relating to the notifications sent to borrowers before issuing LPI. The proposed regulations are set to take effect 30 days after they are published in the State Register.
On May 30, New York Governor Andrew Cuomo and the Department of Financial Services announced that the state obtained agreements from four additional lender-placed insurers – American Modern Insurance, Chubb, Fidelity and Deposit Company of Maryland, and FinSecure. The state’s announcement indicates that, combined with the settlements announced in recent months with Assurant, and with QBE and Balboa, it has now has obtained agreements from all market participants to revise lender-placed insurance practices in that state.
On April 18, New York Governor Andrew Cuomo announced that the New York State Department of Financial Services obtained two additional separate settlement agreements, one with QBE Insurance Company and one with Balboa Insurance Company, stemming from a DFS investigation of the lender-placed insurance industry. Neither company admitted any wrongdoing in connection with their respective settlements. This follows the DFS’ announcement last month that it had reached an agreement with Assurant, pursuant to which the company agreed to pay a $14 million penalty. Like the Assurant settlement, the QBE agreement requires it to (i) re-file rates for lender-placed insurance, (ii) change its disclosures and notices to borrowers, and (iii) discontinue paying commissions to servicer affiliates in New York. QBE agreed to a penalty of $4 million. Balboa, whose business was purchased by QBE in mid-2011 and is currently in run-off, agreed to a $6 million penalty. In addition, borrowers may be entitled to partial premiums refunds if they (i) can prove they defaulted on their mortgage or were foreclosed upon because of lender placement, (ii) were charged for lender placement at a coverage amount higher than permitted by their mortgage, or (iii) were erroneously charged for lender-placed insurance when they had voluntary insurance in effect, or were charged commercial rates for a residence. BuckleySandler represented both QBE and Balboa in the investigation and its resolution.
On April 3, Fannie Mae issued Servicing Guide Announcement SVC-2013-07, which outlines policy updates regarding (i) lender-placed property insurance requirements, (ii) military indulgence reporting and reimbursement processes, and (iii) scheduled/schedule remittance payoffs. Effective immediately, the announcement retracts the lender-placed insurance requirements introduced in Announcement SVC-2012-04, but the hazard insurance claims processing requirements in that 2012 announcement remain in effect. Fannie Mae also replaced in its entirety the sections of Part III, Chapter 1, Exhibit 1: Military Indulgence, that relate to reporting to Fannie Mae and requesting reimbursement for advances. The announcement includes an attachment with the new section, and notes that servicers also must retain the servicemember’s orders and the completed Request for Military Indulgence (Form 180) in the individual mortgage loan file as long as the military indulgence remains in effect. Finally, also effective immediately, the announcement allows a subservicer greater flexibility in deciding whether it will consider any full payoff received on the first business day of a month as though it was received in the prior calendar month. Subservicers may either select one option for all loans serviced on behalf of Fannie Mae or elect the option based on its individual agreement with the servicer for which is it subservicing Fannie Mae mortgage loans.
On March 21, the New York Department of Financial Services (DFS) announced that it obtained a settlement from a major lender-placed insurer to resolve an investigation into the company’s practices. According to the DFS, the insurer allegedly drove up the price of lender-placed insurance by effectively offering banks a share in its profits by: (i) paying commissions to insurance agents and brokers affiliated with the banks even though the agents and brokers did not perform the customary tasks that would justify a commission, (ii) paying banks’ “expenses” related to lender-placed insurance, (iii) paying lump sum amounts, such as one bank’s $1 million termination fee for switching its business to another insurer, and (iv) allowing a reinsurance company owned by a bank to take as much as 75 percent of the premium. The DFS cited the insurer’s low loss ratio as evidence of how profitable lender-placed insurance has been for the insurer. The settlement agreement requires the insurer pay restitution to borrowers who were lender-placed after January 1, 2008 and meet certain criteria, as well as a $14 million penalty. The insurer also must (i) take specific steps to lower the cost of non-flood lender-placed insurance, (ii) cease numerous delineated practices, (iii) provide improved disclosures and notices to borrowers; (iv) improve its email retention policy; and (v) ensure that the amount of coverage lender-placed on any homeowner does not exceed the last known amount of coverage.
On February 22, Fannie Mae issued Servicing Guide Announcement SVC-2013-02, reminding servicers that when they deposit undisbursed insurance loss draft funds into an interest-bearing account, the account must be for the borrower’s benefit and, regardless of the mortgage loan’s delinquency status, the servicer must comply with applicable laws regarding the disbursement of interest earned to the borrower. The announcement also introduced a new form for use when referring a borrower to Fannie Mae for the exit option that allows a three-month transition with no rent payment required, and updated the form to be used when referring a borrower for the exit option that allows up to a twelve-month lease with a market rent payment. On February 27, Fannie Mae issued Servicing Guide Announcement SVC-2013-03, describing servicing policy changes and updates to (i) private flood insurance, (ii) termination of applicable force-placed insurance, and (iii) special remittance type codes. The private flood insurance change follows a related announcement, SEL-2013-02, which, among other things, informed sellers that Fannie Mae must accept flood insurance from private providers as an alternative to National Flood Insurance Program policies. The insurance-related policies are effective immediately, and servicers must report using the new codes for applicable special remittances on or after April 1, 2013.
On October 30, the U.S. District Court for the Northern District of California dismissed a putative class action alleging that the lender breached certain mortgage contracts and violated state and federal law through its policy and practices requiring borrowers to maintain flood insurance sufficient to cover the replacement value of their homes. McKenzie v. Wells Fargo Home Mortg., Inc., No. 11-4965, 2012 WL 5372120 (N.D. Cal. Oct. 30, 2012). The borrowers claim that the FHA requirement that flood insurance must cover the remaining balance of the mortgage served as a cap on the flood insurance amounts the lender could require. Declining to follow the reasoning of the court in Kolbe v. BAC Home Loans Servicing, LP, No. 11-2030, 2012 WL 4240298 (1st Cir. Sep. 21, 2012), the McKenzie court held that because the deeds of trust authorized the lender to set the required level of insurance and the FHA requirement is a statutory floor, the lender did not breach the mortgage contracts by requiring coverage above the outstanding principal loan balance. Therefore, the court dismissed those claims with prejudice. For the same reasons, the court dismissed with prejudice the borrowers’ claims that letters sent to the borrowers notifying them of insufficient coverage altered the terms of their loans and required the lender to make additional disclosures under TILA. The court dismissed, with one opportunity to amend, claims that the lender breached the contract by force-placing insurance through an affiliate that charged excessive amounts allegedly in exchange for kickbacks.