On May 30, the OCC, the FDIC, the Federal Reserve Board, the NCUA, and the Farm Credit Administration issued an interagency statement regarding the increased maximum amount of flood insurance available for “Other Residential Buildings” (i.e., non-condominium residential buildings designed for use for five or more families) beginning June 1, 2014. The statement explains that the maximum amount of flood insurance available under the NFIP for Other Residential Buildings increased from $250,000 to $500,000 per building, which may affect the minimum amount of flood insurance required for both existing and future loans secured by Other Residential Buildings. The statement also informs institutions that FEMA instructed insurers to notify Other Residential Building policyholders—which potentially could include notice to lenders on those policies—of the new limits before June 1, 2014. The agencies state that “[i]f a financial institution or its servicer receives notification of the increased flood insurance limits available for an Other Residential Building securing a designated loan, the agencies expect supervised institutions to take any steps necessary to determine whether the property will require increased flood insurance coverage.” According to the statement, lenders are not required to perform an immediate full file search, but, for safety and soundness purposes, lenders may wish to review their portfolios in light of the availability of increased coverage to determine whether additional flood insurance coverage is required for the affected buildings. If, as a result of this increase, a lender or its servicer determines on or after June 1 that an Other Residential Building is covered by flood insurance in an amount less than required by law, then it should take steps to ensure the borrower obtains sufficient coverage, including lender-placing insurance.
On June 25, the FHFA Office of Inspector General (OIG) published a report that urges the FHFA to consider whether to pursue servicers and insurers for alleged lender-placed insurance (LPI) losses. The OIG cited prior determinations by state insurance regulators that LPI rates in their respective jurisdictions allegedly were excessive and that those rates may have been driven up by profit-sharing arrangements under which servicers allegedly were paid to steer business to LPI providers. The OIG believes that Fannie Mae and Freddie Mac “have suffered considerable financial harm in the LPI market.” The OIG explained that using a methodology similar to that utilized by a state insurance regulator, it estimates that for 2012 alone the combined financial harm due to “excessively priced LPI” amounted to $158 million. The OIG acknowledged that its assessments did not consider compensation already received by Fannie Mae or Freddie Mac from repurchase requests. The report also notes that the FHFA has yet to complete an assessment regarding the merits of potential litigation to recover alleged financial damages associated with the LPI market, but recommends that the FHFA do so and take appropriate action in response. In its response to the report, the FHFA concurred and pledged to complete the review in the next 12 months. The FHFA also pointed out that its litigation assessment would differ from the review conducted by the OIG and would consider potential legal arguments and litigation risks, economic assessments, and relevant public policies.
Fannie Mae Reminds Servicers Of Lender-Placed Insurance Certification Requirements, Updates Servicing Transfer Policies
On May 9, Fannie Mae issued Servicing Guide Announcement SVC-2014-06, which reminds servicers that no later than June 1, 2014 they must certify compliance with new requirements for acceptable lender-placed insurance costs and carriers under an interim process announced in SCV-2013-07. After that date servicers will complete the certification using a new form. The announcement also states that Fannie Mae is adding new definitions related to servicing transfers, and that effective August 1, 2014, Fannie Mae will require the transferor servicer or transferor subservicer to submit the Form 629 to Fannie Mae no earlier than 60 days prior to the proposed transfer date, and that the proposed transfer date must be the first business day of the month for which the transferee servicer will be responsible for reporting the loan-level detail activity to Fannie Mae.
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.
Freddie Mac Requires Lender-Place Insurance Compliance Certification, Updates Foreclosure And Transfer Tax Policies
On March 17, Freddie Mac issued Bulletin 2014-3, which requires servicers to provide a certification that they are or will be in compliance with new lender-placed insurance requirements announced in Bulletin 2013-27. With regard to alternatives to foreclosure, Bulletin 2014-3 (i) makes optional requirements announced in Bulletin 2013-27 related to the processing of modifications for mortgages with pre-modification mark-to-market loan-to-value ratios less than 80%; (ii) requires servicers to provide notices on behalf of Freddie Mac in certain circumstances when Freddie Mac participated in evaluating a borrower for a workout or relief option and declined to approve the workout or relief request; (iii) reorganizes property valuation requirements for modifications; and (iv) provides additional guidance related to paystub requirements for income documentation submitted with a Borrower Response Package. Finally, Freddie Mac also (i) updated requirements for the reimbursement of transfer taxes; (ii) permitted servicers to instruct foreclosure counsel to conduct a foreclosure in Freddie Mac’s name, without obtaining prior written approval, if doing so would avoid any obligation to pay a transfer tax; and (iii) provided guidance on numerous additional servicing issues.
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 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 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.