Nuts and Dolts – Big Banks Defend Force-Placed Insurance

No sooner did I post a piece about the evils of force-placed insurance [here], than American Banker interviewed Kevin McKechnie, executive director of the American Bankers Insurance Association (“ABIA”), about this sensitive subject.  This article is a must read, confirming in spades my contention that Big Banks are morally and ethically vacuous. And by the way, why is there an “association” for bankers’ insurance?  This sounds like a cabal that lurks in the shadows.  They tout their purpose as …”a full service association for bank-insurance interests, ABIA is dedicated to furthering the policy and business objectives of banks in insurance.”  Riddle me this Batman:  Banks lend money.  What ‘objectives’ do they have with insurance? So, herewith are some snippets of the interview with Mr. McKechnie about lender-placed insurance:

American Banker: “ I’ve heard frequent complaints that banks allow delinquent borrowers’ coverage to expire and then force-place much more expensive policies. I’ve found examples of such claims in Florida court records, too, and regulators are looking to put a stop to it. What’s the industry’s take on the proper response when a borrower stops paying an escrowed insurance policy?”

Mr. McKechnie: We asked our membership, and servicers say that as long as there’s coverage in force, even if the account has insufficient funds, they [the banks] advance the funds. You only get to force placement when there’s no valid insurance contract for the servicer to pay.

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There’s been a lot of criticism that banks are actively trying to force place coverage. It doesn’t work that way. We’re doing something the law doesn’t require by giving borrowers free loans so they can pay their homeowners insurance. That’s a big deal.” [Underscore mine. – PCQ]

PCQ Comment: Huh?  The truth is that the Big Banks are forcing an inflated policy of casualty insurance on a home that only protects the lender’s interest at a price that practically guarantees homeowners will be unable to repay.  If homeowners can’t afford their monthly installment payments, how are they going to repay a penalty premium that has been inflated ten-fold?  And what’s free about this?  If you’re advancing the insurance premium dollars, you’re also charging interest.  This is the most specious statement in the entire article.

American Banker: “If that is in fact the way most servicers are handling escrowed accounts, that would remove a highly contentious issue from debate. But if we’re going to fully commit to extending voluntary policies, why not just have the servicer re-up the contract with the voluntary insurer [i.e. the borrower’s existing insurer – PCQ]?”

Mr. McKechnie: “This is something the country hasn’t grappled with and we haven’t seen talked about sufficiently in the press. No one’s contacted an insurer to ask “are you willing to accept the dollars that you get when the risks are more akin to those on force placed?

And if you look at it from the voluntary insurers’ perspective, there’s cause for alarm. When you get to force placement, the risks aren’t known. That’s why force-placed policies are generally more expensive. It’s because the insurer is providing a product for continuous coverage on collateral [a home] they haven’t seen to a borrower they don’t know.” [Underscore mine. – PCQ]

PCQ Comment: Since when did Big Banks begin worrying about insurer risk?!  What about the homeowner?!  What’s wrong with the homeowner’s own insurer that the bank accepted and approved at the inception of the loan?  Why not “re-up” the original policy that’s lapsed?  The banks are already named as additional insureds, so what’s the problem? Admittedly, if the property is vacant, there is a higher risk – which can and should be built in to the new premium – but nothing close to the premium of force-placed insurance.  Non-owner occupied and vacant property is insured by carriers all the time – at rates that reflect the higher risk.  Instead, the banks have turned force-placed insurance into a separate profit center, proving once again, that Default Servicing is Big Business for Big Banks. And to suggest that force-placed insurance is “generally more expensive” because of the higher risk is specious.  It’s more expensive [i.e 10X] because the banks and the others get kick-back fees out of the overpriced premium before it ever reaches the actual insurance carrier who is underwriting the real risk.  If I’m wrong, then why is it not reflected in the claims history?  According to one class action lawsuit discussed in an American Banker article about forced-placed insurance:

“QBE [Wells’ affiliated force placed insurance company] pays out 40% of total force-placed premiums as commission to its subsidiaries and Wells Fargo, the Florida plaintiffs charge. And only 7.6 cents of every dollar of premium revenue QBE collects goes to paying claims, according to a plaintiffs’ analysis based on QBE data. Such a low payout ratio would be regarded as unacceptable in most states. Guidelines laid out by the National Association of Insurance Commissioners instruct insurers to aim for a payout of 60%.“

American Banker: “The thing that initially drew my attention to force-placed insurance as a subject was the commissions force-placed insurers paid to banks. Why has buying insurance on behalf of borrowers turned into a profit center for lenders?”

Mr. McKechnie: “In states where it’s permissible to collect commissions, generally lenders do. What we’re looking at here isn’t really whether it’s correct or incorrect to collect a commission on force-placed insurance, because I think federal law makes it clear that’s a permissible act.” [Underscore mine. – PCQ]

PCQ Comment: Translation – “Morals and ethics have nothing to do with this.  As long as it doesn’t violate a law, then By Golly, we’re gonna do it!”  It’s as simple as forming a bank subsidiary, registering it as an insurance company, and collecting a commission on every force placed policy underwritten by the “real” insurance company.  Whether it is right or wrong is not part of the decision making calculus for Big Banks.  If they can turn a profit on a borrower’s default, they will, and they do.

American Banker: “But how can large banks justify collecting commissions on force-placed premiums at all, given that the lenders often outsource the complete administration of the force-placed program, with insurers handling loan tracking and fielding borrower contacts? One major bank’s force-placed insurance agency didn’t even employ insurance agents. So what are banks doing that warrants a commission if their only involvement is to give insurers rights to write policies on their portfolios?”

Mr. McKechnie: “I would contest the idea that there’s no work being done for the remuneration a bank receives. The work is the vetting and selection of a carrier. It’s in evaluating what metrics you apply, how effective your call center is, how quickly you return unearned premiums. In other areas, servicers collect fees, but in insurance it’s always on a commission basis.”

PCQ Comment: I couldn’t resist saving the best for last.  What this amounts to is the finest example of dissembling I’ve heard uttered on behalf of the force placed insurance scam.  Here’s my ‘take away’:

  • Vetting and selection of a carrier’: Translation:  Determining which company will kickback the largest percentage of an already overpriced premium.
  • Evaluating ‘the metrics’: Translation: Figuring out how to pile on enough fees, expenses and penalties so the homeowner never pulls out of the death spiral.
  • ‘Call center’ efficiency’: Translation:  Teaching low level employees to read scripts from a computer monitor;
  • And lastly ‘…how quickly you return unearned premiums’: If he’s referring to  homeowners, we know there are no ‘unearned premiums’ – that’s why the insurance was force-placed, i.e. there were no premiums to pay for the homeowner’s own insurance policy. And in every short sale and deed-in-lieu I’ve ever seen, all unearned reserves [i.e. impounds], are retained by the bank.  If people were pens, this guy wouldn’t be a Sharpie®.

Conclusion: The one thing missed is this otherwise insightful article, was who actually is holding the bag for the force- placed insurance premiums? It really isn’t the homeowners – unless they were able to cure the entire default, together with all the late fees, penalties, and force-placed premiums.  And we know it isn’t the banks, even though [in their capacity as servicers] they do advance the exorbitant premiums.

The answer lies in understanding the servicing agreement that Big Banks operate under – especially when servicing non-performing loans.  In short, the servicers advance the monies, and then recover them back, with interest, fees and penalties imposed on the homeowner at the time that the foreclosure is completed.  This means that it is either Fannie[1] or Freddie [i.e. the U.S. Taxpayers] or the investors who purchased the private-label securities [i.e. non-GSEs] sold to them by the Wall Street investment banks, such as Goldman Sachs.  In short, the Big Banks never lose.  In this entire foreclosure mess the country is going through today, the Big Banks have still found a way to come out ahead.

[1] Fannie has finally wised up.  For a legal memo to the ABIA discussing Fannie’s new rules, go to this link.