Policy: Law

US weighs lawsuits on alleged insurance kickbacks

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WASHINGTON (AP) — The government is considering suing banks and other mortgage servicers over alleged insurance kickbacks that may have cost government-controlled mortgage companies Fannie Mae and Freddie Mac hundreds of millions, according to an internal federal report.

The agency responsible for guarding the mortgage giants' finances told its inspector general's office that it will decide over the next year whether to sue.

Fannie Mae and Freddie Mac, which have been under the agency's conservatorship since 2008, lost an estimated $168 million from the fees in 2012 alone, according to the report.

The Federal Housing Finance Agency did not accept that figure. But the agency said in response to the report that it "does not object" to the recommendation that it consider suing.

The FHFA barred banks and other mortgage servicers from collecting payments from insurers on June 1. But the agency does not normally discuss prospective litigation and has not previously indicated that it might consider suing over past misbehavior.

Should the agency decide to sue, the cases could reopen a controversy over how the biggest banks profited from what is known as "force-placed insurance."

This high-cost version of property insurance protects the homes of uninsured borrowers. Banks typically buy it when a borrower falls behind on mortgage and insurance payments.

After the 2008 housing bust, force-placed insurance ballooned into a $1 billion-a-year industry.

According to a 2012 investigation by New York's Department of Financial Services and private lawsuits, large banks and insurers colluded to inflate the price of force-placed insurance and split the profits.

Insurers paid banks for referring business. Struggling homeowners and mortgage investors such as Fannie Mae and Freddie Mac bore the cost in the form of higher insurance premiums, often many times the price of normal homeowners insurance.

Because insurance kickbacks are illegal, major banks and insurers allegedly contrived to mask the payments as legitimate business transactions.

The FHFA inspector general's report did not name specific institutions. But some banks, including JPMorgan Chase, Wells Fargo and Citigroup, set up insurance agencies to accept supposed commissions from the two dominant force-placed insurers, Assurant and QBE.

But as New York and private plaintiff's attorneys separately uncovered, these bank-owned insurance agencies were little more than empty shells.

In one example, JPMorgan's own employees stated in court documents that a bank-owned insurance agency did not employ a single insurance agent. In other instances, insurers rewarded banks through generous reinsurance deals or simple, lump-sum multimillion-dollar payments, the state found.

In the wake of New York's investigation, other state probes and private suits, many of the largest mortgage servicers, including JPMorgan, Wells Fargo and Citigroup, renounced commissions in 2012 and 2013.

Those banks and other mortgage servicers that might be subject to such suits either declined to comment or did not immediately respond to telephone calls and email messages seeking comment on the threat of litigation.

Consumer advocates, who have pressed the FHFA to be more aggressive on force-placed insurance, praised the internal report and the agency's declaration that it would consider the merits of legal action.

"The report lays out clearly what happened, and it proposes going after the damages done to the (government sponsored) enterprises," said Robert Hunter, director of insurance for the Consumer Federation of America.

Hunter, a former Texas insurance commissioner who has served as an expert witness in force-placed insurance cases, said that if the FHFA sues, "it will encourage private lawyers to go after the damages to regular people who paid excessive premiums."

Over the past three years, mortgage servicers and their force-placed insurers have paid out $674 million to settle such cases, preventing a single one from reaching trial. Last September, JPMorgan and Assurant reached the biggest single settlement, a $300 million payout.

According to New York's Department of Financial Services, JPMorgan Chase took in more than $600 million from force-placed reinsurance deals since 2006.

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