On June 25, 2014, the inspector general of the Federal Housing Finance Agency (FHFA) issued a report on force-placed insurance with only one recommendation: FHFA should consider suing servicers and force-placed insurers for hundreds of millions of dollars in allegedly “excessive” force-placed insurance premiums.
As we discussed in a recent blog post, “force-placed” or “lender-placed” insurance is an area of increasing controversy, with Fannie Mae and Freddie Mac rolling out new restrictions on perceived conflicts of interest between insurers and the servicers that bring them business. The inspector general noted these reforms going forward, but believes that FHFA should also assess how to pursue perceived past abuses.
The inspector general’s report outlines the recent history of enforcement actions and private litigation against servicers and force-placed insurers. It notes that New York, Florida, and California regulators sanctioned insurers in 2012 and 2013 for allegedly violating state insurance law by charging excessive rates. It also summarizes borrower class action lawsuits beginning in 2011 that have cumulatively obtained at least $674 million in damages from servicers and force-placed insurers. The inspector general’s clear message is that FHFA should consider getting in on the action.
The report estimates Fannie Mae and Freddie Mac reimbursed servicers for $360 million in force-placed insurance charges in 2012, $158 million above what the inspector general estimated was the reasonable price for such insurance. If that measure of harm for one year is accurate, the damages over several years could be counted in the hundreds of millions.
Finally, the report gives some advice to FHFA’s general counsel about possible legal theories to recover those sums. The report suggests that, like in the borrower class actions, the alleged excessive charges and conflicts of interest may have been a breach of the contractual covenant of good faith and fair dealing, a breach of fiduciary duty, and/or unjust enrichment. In a footnote, the report raises the possibility that the Department of Justice could bring claims under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) or the False Claims Act. FIRREA contains severe civil money penalties, and the False Claims Act permits double or triple damages in some circumstances. The inspector general is careful to note that these are simply ideas for FHFA to research.
In FHFA’s brief response letter to the report (Appendix A), the general counsel agreed to assess whether to sue servicers or force-placed insurers within the next 12 months. However, the general counsel remarked that his office “does not comment publicly on its litigation analyses or plans.”