By Cora Currier (ProPublica): A class-action lawsuit in Florida that moved forward this week highlights a little-appreciated aspect of the housing market — the cozy relationship between banks and insurance companies that often results in overpriced home insurance for already struggling borrowers.
As American Banker reported, a federal judge in Miami on Tuesday opened the door to a class action against Wells Fargo. More than 20,000 Florida homeowners can now sue Wells Fargo and an insurance company, QBE, for allegedly overcharging for insurance. More than $50 million in insurance premiums are at issue, according to American Banker.
The suit itself, filed last year, is sealed, but the judge, Robert Scola, laid out the allegations against Wells Fargo. The judge didn't rule on the case but allowed it to go forward as a class action. In his decision, the judge cited the plaintiffs' claims that Wells Fargo and QBE "colluded in a scheme to artificially inflate the premiums charged to homeowners."
The judge also said Wells Fargo has actually threatened to retaliate against homeowners who join the suit.
A spokesman for Wells Fargo said in an emailed statement that "the judge's recent ruling only addresses the certification of the class in this case and not any of the underlying claims. We disagree with a number of the representations made by the plaintiffs' attorneys."
The bank also disputed the judge's claim that it threatened retaliation for the suit, saying "we made our argument in a purely procedural context in connection with the class certification motion. Wells Fargo has no intention of taking the actions referenced with regard to our customers."
QBE did not respond to our requests for comment.
The case sheds light on the world of force-placed insurance, an industry that has grown in the years since the housing crisis. Among all the suits and scandals related to the crisis, troubles with force-placed insurance have flown largely under the radar. Here's some background on the lawsuit and why there might be more of suits to come.
What force-placed insurance is and why it's controversial
Force-placed insurance is just what it sounds like — insurance you are forced to buy.
This insurance is meant to protect mortgage lenders against damage to homes. If the homeowner doesn't have insurance on a house, or has let it lapse, most mortgage contracts allow the lender to buy the insurance and pass on the cost to the borrower.
Some homeowners, though, have complained of sudden and excessive penalties, as well as policies that seem to be added unnecessarily — and sometimes retroactively — to their bills. What's more, the cost of force-placed insurance can be 10 times that of a regular policy, adding to the homeowner's burden and increasing the chance of default, which is bad for both homeowners and investors in the mortgage market.
Lenders, of course, need to make sure that the asset behind a loan is safe. Force-placed insurance is expensive, the industry argues, because it is high-risk — if you're the kind of homeowner who doesn't have any insurance on your property, you're probably also likelier to default. And because force-placed insurance often replaces lapsed insurance, insurers take on more risk because it has to happen quickly.
But as American Banker started reporting in 2010, problems can arise when banks also make big money off these insurance policies. Bank of America, until recently, owned the company that provided its force-placed insurance. Other banks, including Wells Fargo, contract with insurance companies and get a commission from the policies placed on homes underlying their mortgages.
In some cases, American Banker reported, an insurance company appears to be paying a bank to do nothing except pass along customers. The bank, in turn, has an incentive to force insurance onto its borrowers.
The charges against Wells Fargo
The suit alleges that Wells Fargo and insurer QBE inflated the costs of force-placed insurance policies and that QBE paid commissions to Wells Fargo — commissions the plaintiffs say amounted to kickbacks.
In his approval of the class-action suit, the judge summarized the plaintiffs' allegations:
American Banker reported that internal Wells Fargo email messages seem to show that some bank employees were uncomfortable with QBE's high premiums. In court proceedings, Wells Fargo said the pricey policies were justified because of Florida's vulnerability to hurricanes.
Wells Fargo also argued that borrowers could have avoided the need for force-placed insurance and thus shouldn't be able to complain about the expensive premiums.
To that, U.S. District Court Judge Scola responded: "That's like a defense for usury … you are going to have a defense that they live a bad lifestyle which leads them to be more in a position to be taken advantage of ...? That makes no sense."
The case materials were originally public before Wells Fargo got them sealed, citing business confidentiality concerns. American Banker's review of the case is based on materials that it reviewed before the case was sealed, while the rest is gleaned from Scola's opinion on the class-action designation.
Fighting a class-action suit
Wells Fargo and QBE didn't want a class-action designation because they said individual borrowers' claims would vary too much, an argument that didn't win over the court.
The judge also wrote that Wells Fargo actually threatened to escalate foreclosure proceedings against homeowners who joined the class-action suit. The bank's arguments against the class action, he said, "unabashedly set out its threats to retaliate against any homeowner seeking to avoid the alleged excessive and inflated force-placed insurance premiums through this litigation."
The judge based his conclusion on certain types of borrowers that Wells wanted excluded from a class action, including those who were in default. Scola claimed that for people in default on their mortgages:
Wells Fargo, as we mentioned above, denies that it planned to take these actions.
Not the only ones
It's not just Wells Fargo that could face litigation. The plaintiffs' attorneys have said they plan to file similar suits beyond Florida. The New York State Department of Financial Services subpoenaed 31 banks in October, including Wells Fargo, to look into what a spokesman called the "sometimes problematic overlap between banking and insurance."
Last summer, a class-action suit in Minneapolis won more than $9 million from Chase Home Finance for 40,000 homeowners who claimed Chase forced them to buy unnecessary flood insurance.
There may be new regulations in the works clamping down on force-placed insurance, but so far nothing has been implemented.
In an op-ed published earlier this month, Richard Cordray, director of the new Consumer Financial Protection Bureau, promised "new consumer protections" that would require banks to allow borrowers to purchase their own insurance. This month's big mortgage settlement, to which Wells Fargo is a party, also promises restrictions and regulations to reduce premiums and force banks to communicate more clearly with homeowners. But it is unclear exactly how the deal's rules will be enforced or how they fit into the CFPB's promised regulations. The CFPB did not immediately respond to our requests for comment.