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IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF NEW YORK GORDON CASEY and DUANE SKINNER, individually and on behalf of all others similarly situated,

Plaintiffs, v. CITIGROUP, INC., CITIBANK, N.A., CITIMORTGAGE, INC., MIDFIRST BANK, N.A. d/b/a MIDLAND MORTGAGE, and FIRSTINSURE, INC.,

Defendants.

AMENDED CLASS ACTION COMPLAINT Civil Action No.: 5:12-cv-820 (DNH/DEP) Jury Trial Demanded

Plaintiffs Gordon Casey and Duane Skinner (“Plaintiffs”), individually and on behalf of

all others similarly situated, through their undersigned counsel, bring this Amended Class Action

Complaint against Defendants Citigroup, Inc. (“CitiInc”), Citibank, N.A. (“Citibank”),

CitiMortgage, Inc. (“CitiMortgage”) (collectively, “Citigroup”), MidFirst Bank, N.A. d/b/a

Midland Mortgage (“Midland”), and FirstInsure, Inc. (“FirstInsure”) (collectively “Defendants”).

PRELIMINARY STATEMENT

1. Plaintiffs and the Class have mortgages1 secured by residential property, and were

required to purchase flood insurance by Citigroup and/or Midland.

2. Defendants have systematically violated the legal rights of Plaintiffs and Class

members in two separate, independent and fundamental respects, as set forth below.

1 The term “mortgage” as used herein also refers to deeds of trust and other types of security instruments.

Case 5:12-cv-00820-DNH-DEP Document 21 Filed 07/26/12 of 52

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3. First, Citigroup and Midland unfairly, unjustly, and unlawfully forced Plaintiffs

and Class members to purchase and maintain flood insurance in amounts greater than required by

law, greater than required by their written mortgage agreements, and greater than Defendants’

financial interest in their property.

4. Second, Defendants unfairly, unjustly, and unlawfully profited from force-placing

flood insurance on Plaintiffs’ properties and the properties of Class members, by charging

amounts in excess of the net costs incurred by Defendants for such insurance and by arranging

for kickbacks, commissions or other compensation for Defendants and/or their affiliates in

connection with force-placed flood (also known as lender-placed) insurance.

5. Defendants engaged in this conduct in bad faith, knowing these actions were

contrary to applicable law, reasonable commercial standards of fair dealing, and the reasonable

expectations of borrowers upon entering into their mortgage agreements.

6. Based on Defendants’ conduct as alleged in detail below, Plaintiffs assert the

following claims:

a) breach of contract/breach of the implied covenant of good faith and fair

dealing (against Citigroup and Midland);

b) unjust enrichment (against all Defendants);

c) breach of fiduciary duty/breach of trust (against Citigroup and Midland);

d) conversion (against all Defendants);

e) violation of the federal Truth-in Lending Act (“TILA”) (by Skinner

against Citigroup and by Casey against Midland); and

f) violation of the New York Deceptive Practices Act (“NYDPA”) (by

Plaintiff Casey against Citigroup and Midland).


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7. Plaintiffs assert these claims on behalf of two proposed classes and two proposed

subclasses (together, the “Classes”) of Citigroup and Midland mortgagors, as defined below in

Paragraphs 82 through 89.

8. Plaintiffs and the Classes seek injunctive relief, corresponding declaratory relief,

monetary relief, and other appropriate relief for Defendants’ unlawful conduct.

PARTIES

9. Plaintiff Gordon Casey resides in Syracuse, New York. Mr. Casey’s mortgage

loan uses the standard FHA form deed of trust. His loan is currently serviced by Midland and

was formerly serviced by CitiMortgage.

10. Plaintiff Duane Skinner resides in Pasadena, Maryland. Mr. Skinner’s mortgage

loan uses the Fannie Mae/Freddie Mac form deed of trust. His loan is currently owned by Fannie

Mae and serviced by CitiMortgage.

11. Defendant CitiInc is a global diversified financial services holding company that

conducts business throughout the United States. CitiInc is a Delaware corporation with its

principal place of business at 399 Park Avenue, New York, New York and as such, is a citizen of

the State of New York.

12. Defendant Citibank is one of the nation’s largest banks, and has its principal place

of business in New York, New York. Citibank is engaged in the business of mortgage lending

throughout the United States.

13. Defendant CitiMortgage is an affiliate of Citibank. CitiMortgage is

headquartered in O’Fallon, Missouri, and services mortgages on behalf of Citibank throughout

the United States. At all relevant times, CitiMortgage’s conduct was approved, authorized,


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and/or ratified by CitiInc and Citibank, and CitiMortgage was acting as the agent of CitiInc and

Citibank.

14. Defendant Midland is headquartered in Oklahoma City, Oklahoma, and is

engaged in the business of mortgage lending and servicing throughout the United States.

15. Defendant FirstInsure is an affiliate of Midland, and is headquartered in

Oklahoma City, Oklahoma. FirstInsure is registered with the Oklahoma Secretary of State as a

domestic for-profit insurance corporation. FirstInsure does business in the State of New York,

and receives commissions in connection with lender-placed flood insurance policies covering the

property of Midland mortgagors in New York and other states.

JURISDICTION AND VENUE

16. This Court has federal question jurisdiction over Plaintiffs’ TILA claims pursuant

to 28 U.S.C. § 1331, and has supplemental jurisdiction over Plaintiffs’ state law claims pursuant

to 28 U.S.C. § 1367.

17. This Court also has original jurisdiction under the Class Action Fairness Act

(“CAFA”), 28 U.S.C. § 1332(d)(2). Plaintiff Casey is a citizen of New York, Plaintiff Skinner is

a citizen of Maryland, and three of the Defendants are citizens of different states. The amount in

controversy in this action exceeds $5,000,000.00, and there are more than 100 members of the

Classes.

18. Venue is proper in the United States District Court for the Northern District of

New York pursuant to 28 U.S.C. § 1391, because Plaintiff Casey resides in this District,

Defendants regularly transact business in this District, and a substantial part of the events giving

rise to this Complaint arose in this District. In addition, a substantial percentage of the members

of the Classes are citizens of New York, many of whom reside in this District.


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FACTUAL ALLEGATIONS The National Flood Insurance Program and Regulations

19. The National Flood Insurance Act, 42 U.S.C. § 4001, et seq. (“NFIA”), requires

lenders to ensure that flood insurance coverage is maintained on any improved property securing

a loan or line of credit that falls within a Special Flood Hazard Area (“SFHA”). Under the

NFIA, the amount of coverage must be at least equal to the lesser of: (1) the outstanding balance

of the loan; (2) the maximum insurance coverage available through the NFIP, which is $250,000;

or (3) the replacement cost of the property. See 42 U.S.C. § 4012a(b)(1).

20. The Department of Housing and Urban Development (“HUD”), which operates

the Federal Housing Administration (“FHA”), also states that flood insurance coverage on FHA

Loans need not exceed the outstanding principal balance of the loan. See, e.g.,

http://www.hud.gov/offices/cpd/environment/review/floodinsurance.cfm (last visited July 20,

2012) (“Dollar Amount of Flood Insurance Coverage. For loans, loan insurance or guarantees,

the amount of flood insurance coverage need not exceed the outstanding principal balance of the

loan.”); accord, 24 C.F.R. § 203.16a(c) (“flood insurance must be maintained . . . in an amount at

least equal to . . . the outstanding balance of the mortgage”).2

21. Similarly, Fannie Mae and Freddie Mac provide mortgage servicers with

guidelines on flood insurance requirements for their mortgage portfolios. See, e.g.,

https://www.efanniemae.com/sf/guides/ssg/svcg/svc061011.pdf; see also

http://www.allregs.com/tpl/Main.aspx. Since at least 2007, the Fannie/Freddie guidelines are

satisfied if the borrower maintains flood insurance coverage equal to the federal requirements.

22. Loan servicers are obligated to abide by Fannie Mae’s and Freddie Mac’s

2 HUD’s flood insurance requirements have not changed during the relevant time period.


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guidelines on loans owned by those entities when servicing those loans. The standard Fannie

Mae/Freddie Mac mortgage (such as Mr. Skinner’s) distinguishes between contractual rights

reserved to the “Lender” or owner of the loan and those rights the servicer may assume. The

right to set or change flood insurance requirements is reserved to the Lender.

23. Defendants are also incapable of setting or changing flood insurance requirements

applicable to FHA loans (such as Mr. Casey’s). The standard FHA deed of trust reserves the

right to set and change flood insurance requirements to the Secretary of HUD.

24. Loan servicers profit from servicing loans by extracting payments for themselves

or their affiliates, in addition to the principal and interest payments that are due to the lender.

For this reason, the kickbacks or “commissions” paid to servicers and their affiliates on force-

placed insurance are very lucrative for them. Moreover, if the practices of the servicer lead to

default or modification of the loan, the servicer can collect even further payments and/or fees,

while being fully protected from any loss of principal on the loan, since that risk is fully borne by

the owner or guarantor of the loan.

25. Thus, without ownership of the underlying loans, Defendants suffer no

consequences if their force-placed flood insurance scheme forces borrowers into foreclosure

because that loss is borne by the owner of the loans. The owner of Mr. Skinner’s loan is Fannie

Mae. In the case of Mr. Casey, who has an FHA loan, any default is insured by the FHA,

immunizing Defendants from any losses associated by default and foreclosure.

26. Defendants have engaged in a scheme to generate additional fees and income for

themselves by requiring borrowers whose loans they service to purchase additional flood

insurance in excess of the requirements under the NFIA, the mortgage agreements, the

requirements of HUD, and Fannie Mae/Freddie Mac’s guidelines. Through this practice,


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Defendants generate significant profits for themselves through, inter alia, commissions,

kickbacks, and in-kind payments and other fees.

History of Mr. Skinner’s Mortgage Loan

27. On October 5, 2011, Plaintiff Skinner obtained a mortgage loan from Real Estate

Mortgage Network, Inc., the originating Lender, in the amount of $142,000. See Exhibit 1.

28. The mortgage loan was secured by Mr. Skinner’s home using the standard Fannie

Mae/Freddie Mac security instrument/deed of trust.

29. Subsequent to closing, Citigroup acquired the servicing rights as the loan was sold

to Fannie Mae.

30. The current principal balance of the loan is approximately $142,000.

Citigroup Refuses to Accept Prior Determination that Mr. Skinner’s Home is Not in a SFHA

31. As part of and required for closing the loan, the originating Lender, Real Estate

Mortgage Network, Inc., had a Flood Hazard Determination conducted by LandSafe Flood

Determination, Inc. (“LandSafe”), a company whose primary function is to determine whether

properties are in a flood zone that requires maintenance of flood insurance pursuant to the NFIA.

See Exhibit 2. LandSafe’s Flood Determination, as captured on the Standard Flood Hazard

Determination Form (“SFHDF”), states that Skinner’s property is in Flood Zone “C”, and that

“flood insurance is not required by the Flood Disaster Protection Act of 1973.”3

32. As a result of the September 15, 2011 Flood Determination, Mr. Skinner was not

required to have flood insurance in order to close the loan. The loan closed on or about October

5, 2011 without the original Lender requiring flood insurance.

3 Zones requiring flood insurance are noted with an “A” or “V”.


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33. Almost immediately after Citigroup acquired the servicing rights to Mr. Skinner’s

loan, however, Citigroup began demanding that Mr. Skinner purchase flood insurance, despite

LandSafe’s prior determination that he was not in a flood zone that necessitated flood insurance.

34. On January 9, 2012, CitiMortgage sent Mr. Skinner a letter indicating that it had

determined that his property is in flood zone “A9” and that flood insurance is required. See

Exhibit 3.

35. When Mr. Skinner subsequently sought to prove to Citigroup that its flood

determination was incorrect, Citigroup failed to accept LandSafe’s independent flood

determination that had been accepted at closing.

Citigroup Force-Places Excessive Flood Insurance Coverage on Mr. Skinner

36. Even assuming that LandSafe’s initial determination was inaccurate and that Mr.

Skinner’s property is located in an SFHA, the applicable flood insurance requirement is set by

federal law and Fannie Mae. As noted above, both federal law and Fannie Mae (the current

owner of Mr. Skinner’s loan) only require that flood insurance be at least the lesser of: (1) the

outstanding principal balance; or (2) replacement cost up to the maximum amount of flood

insurance available under the NFIP ($250,000). However, Citigroup sought to impose a different

(and more onerous) requirement on Skinner.

37. On January 21, 2012, CitiMortgage sent Mr. Skinner a letter entitled “Notice of

Flood Insurance.” See Exhibit 4. In this letter, CitiMortgage informed Mr. Skinner that he was

required to obtain $250,000 in flood insurance coverage, despite the fact that Mr. Skinner’s

outstanding principal balance was only $142,000. In addition, the letter stated that Citigroup’s

flood coverage requirement was at least the greater of:

80% of the replacement value of your property, as represented by your hazard policy coverage amount; or


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The unpaid principal balance of all liens on your property; o However, the resulting coverage may not exceed 100% of the

replacement value of your property or the maximum amount of coverage available through the National Flood Insurance Program (NFIP) of $250,000.

38. CitiMortgage’s January 21, 2012 letter further stated that “we have calculated the

minimum required coverage based upon the amount of flood insurance required when you closed

your loan….” As demonstrated above, however, Mr. Skinner was not required to have any flood

insurance when he closed on his loan, so CitiMortgage’s letter was false, deceptive, and

misleading.

39. On February 4, 2012, CitiMortgage sent Mr. Skinner a letter of force-placement

stating that Citigroup had force-placed flood coverage of $250,000 through American Security

Insurance Company (“ASIC”) at an annual premium of $2,250.00. See Exhibit 5.

40. Mr. Skinner continued to attempt to contact Citigroup after receiving the February

4, 2012 letter to prove that insurance was not required, but Citigroup has refused to refund the

charge it unilaterally imposed for the force-placed flood coverage. Citigroup has even gone so

far as to threaten foreclosure on Mr. Skinner’s property (see Exhibit 6), even though Mr. Skinner

has an exemplary payment history and has timely paid all regular monthly payments as required.

The only amount “outstanding” is the amount that Citigroup is forcibly extracting from Mr.

Skinner for the unnecessary flood insurance, which is causing Mr. Skinner’s mortgage to falsely

appear as though it is in arrears.

History of Plaintiff Casey’s Mortgage Loan

41. On or about July 16, 2002, Mr. Casey obtained an FHA loan from HCI Mortgage

(“HCI”) for approximately $25,000, secured by a mortgage on his home. See Exhibit 7.


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42. Citibank acquired Mr. Casey’s mortgage loan from HCI shortly thereafter. From

2002 to 2011, Citibank was the lender-in-interest to Mr. Casey’s mortgage, and during this time,

CitiMortgage serviced Mr. Casey’s mortgage loan on behalf of Citibank.

43. In or around late 2011, Citibank transferred its interest in Mr. Casey’s mortgage

to Midland, and since then, Midland has been the lender-in-interest to the mortgage and has

serviced Mr. Casey’s loan.

44. The current principal balance of Mr. Casey’s mortgage loan is less than $17,000.

Flood Insurance Requirements for Mr. Casey’s Residence

45. Because Mr. Casey’s home falls within a SFHA, his mortgage loan is subject to

the requirements of the NFIA and he must maintain flood insurance “in an amount at least equal

to the outstanding principal balance of the loan or the maximum limit of coverage made

available under the Act, whichever is less.” 42 U.S.C. § 4012a(b)(1) (emphasis added).

46. Mr. Casey’s mortgage does not require him to maintain flood insurance on his

home in excess of the minimum amount required by federal law (i.e., in excess of his principal

balance). Paragraph 4 of Mr. Casey’s mortgage states that he is obligated to “insure all

improvements on the Property, whether now in existence or subsequently erected, against loss by

floods to the extent required by the Secretary” of HUD.4 See Exhibit 7, ¶ 7. HUD’s website, in

turn, provides as follows:

4 This is the only provision of the mortgage that addresses flood insurance. Although Paragraph 4 contains a separate provision relating to the amount of hazard insurance that is required as a condition of the loan, flood insurance is different from hazard insurance. For this reason, many of the documents that Mr. Casey signed upon origination of his mortgage loan – including his HUD-1 Settlement Statement, Federal Truth-In-Lending Disclosure Statement, and Initial Escrow Account Disclosure Statement – refer separately to flood insurance and hazard insurance. See Exhibits 8-10.


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Dollar Amount of Flood Insurance Coverage. For loans, loan insurance or guarantees, the amount of flood insurance coverage need not exceed the outstanding principal balance of the loan.

http://www.hud.gov/offices/cpd/environment/review/floodinsurance.cfm (last visited July 20,

2012); accord, 24 C.F.R. § 203.16a(c) (“flood insurance must be maintained . . . in an amount at

least equal to . . . the outstanding balance of the mortgage”).

Citigroup Force-Places Excessive Flood Insurance Coverage on Mr. Casey

47. Pursuant to federal law and the terms of his mortgage, Mr. Casey obtained

$25,000 in flood insurance coverage upon originating his mortgage loan. See Exhibit 11. This

amount was deemed adequate by HCI as the original lender-in-interest, and was deemed

adequate by Citigroup at the time Citigroup acquired Mr. Casey’s loan.

48. For years, Mr. Casey continued to maintain flood insurance on his home in an

amount sufficient to cover his outstanding principal balance, and even increased his flood

insurance coverage slightly over time. Prior to 2010, Citigroup never contended that his

coverage was inadequate.

49. For the period from July 13, 2009 to July 13, 2010, Mr. Casey maintained

$30,300 in flood insurance coverage on his home. See Exhibit 12. This amount was more than

sufficient to cover his outstanding principal balance.

50. On June 23, 2010, however, CitiMortgage sent Mr. Casey a form letter on behalf

of Citibank (“First CitiMortgage Letter”), suddenly claiming that his flood insurance coverage

was “deficient.” See Exhibit 13.

51. According to the First CitiMortgage Letter, Mr. Casey was required to carry flood

insurance coverage at least equal to the greater of 80% of the replacement cost value of his

property or the unpaid principal balance of all liens on his property, up to $250,000. This so-


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called requirement (which is identical to the requirement imposed on Mr. Skinner) is not

specified anywhere in Mr. Casey’s mortgage or other loan documents.

52. Based on this so-called requirement, CitiMortgage contended that Mr. Casey was

required to increase his flood insurance coverage by $107,780.5 The First CitiMortgage Letter

further stated that if Mr. Casey did not increase his flood insurance coverage by this amount,

CitiMortgage would purchase a flood insurance policy for him and charge the premiums to his

escrow account.

53. On August 7, 2010, CitiMortgage sent Casey a second form letter on behalf of

Citibank (“Second CitiMortgage Letter”), claiming that “your current flood policy is less than

the amount of flood insurance required.” See Exhibit 14. The Second CitiMortgage Letter

further indicated that CitiMortgage had obtained a flood insurance binder for Mr. Casey’s

property in the amount of the alleged deficiency.

54. On August 20, 2010, CitiMortgage sent Mr. Casey a third form letter on behalf of

Citibank (“Third CitiMortgage Letter”) informing him that CitiMortgage had purchased a one-

year flood insurance policy for his property from ASIC. See Exhibit 15.

55. This force-placed flood insurance policy provided an additional $107,780 in flood

insurance coverage for Mr. Casey’s property at an annual premium cost of $970 that was paid

out of his escrow account. This was purely excess coverage,6 and was totally unnecessary to

protect Citigroup’s financial interests because its financial stake in Mr. Casey’s property was

5 CitiMortgage contended that this amount was the “difference between the amount of [Mr. Casey’s] existing flood insurance and the minimum acceptable coverage amount.” Id. As noted above, however, Mr. Casey’s existing coverage amount already exceeded the level of coverage specified by the NFIA, HUD, and the terms of his mortgage. 6 The Third CitiMortgage letter explicitly states that “coverage under this policy will only apply if a loss exceeds the amount of coverage provided by your existing insurance policy.”


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already fully protected by Mr. Casey’s existing flood insurance policy, which listed

CitiMortgage as an insured mortgagee. CitiMortgage unilaterally purchased this excess coverage

without Mr. Casey’s consent, and he did not want this coverage.

56. In July 2011, Mr. Casey increased his flood insurance coverage level to $188,300,

to satisfy Citigroup’s flood insurance requirements and avoid being charged for another force-

placed policy.7 See Exhibit 16. At that point, CitiMortgage cancelled his force-placed coverage

effective July 13, 2011, but refused to refund charges for force-placed coverage prior to that date.

57. Plaintiff has never filed any claims on the lender-placed policy (or any other flood

insurance policy), and his mortgage payments increased significantly after the force-placed

premium was built into the monthly payment amounts. This imposed a significant financial

burden on Mr. Casey.8

58. Mr. Casey has made the increased payments in full, in order to avoid damaging

his credit or jeopardizing his ability to remain in his home.

Citigroup Receives a Kickback on Force-Placed Flood Insurance Policies

59. Citigroup and/or its affiliates received a kickback or commission from ASIC or

ASIC’s parent company (Assurant, Inc.) on the excessive lender-placed coverage that was

charged to Plaintiffs. Although this commission arrangement was kept secret from Plaintiffs and

was not disclosed to them in any of the form letters they received, the commissions paid by

ASIC or ASIC’s parent company to lenders and/or their affiliates on force-placed insurance

coverage are the subject of numerous reported cases. See, e.g., McNeary-Calloway v. JP

7 But for Citigroup’s excessive insurance demands, Plaintiff would not have obtained this additional coverage and would not have incurred the cost of this additional coverage. 8 Mr. Casey is a disabled former factory worker and lives with his wife on a fixed monthly disability check.


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Morgan Chase Bank, N.A., No. C-11-03058 JCS, 2012 WL 1029502, at *23 (N.D. Cal. Mar. 26,

2012); Hofstetter v. Chase Home Fin. LLC, No. 10-1313, 2011 WL 1225900 (N.D. Cal. Mar. 31,

2011); Gipson v. Fleet Mortgage Group, 232 F. Supp. 2d 691, 705-06 (S.D. Miss. 2002).

60. These commission arrangements are also the subject of publicly-filed deposition

testimony. For example, in Hofstetter, Chase’s representative testified that it is “a standard

industry-wide practice” for a mortgage lender to be paid a commission by the insurance provider

in connection with lender-placed flood insurance. See Exhibit 17 at 67:5-14.9 Like Citigroup,

Chase procures its force-placed flood insurance coverage through ASIC. Id. at 68:16-69:14.

61. Moreover, the commission arrangements between major banks and insurance

firms -- including ASIC’s parent company, Assurant, Inc. -- have been reported in American

Banker magazine (see Exhibit 18), and are the subject of a pending investigation by the New

York Department of Financial Services (“NYDFS”), which has “uncovered evidence of

potentially problematic and abusive practices in the industry occurring at the expense of

homeowners[.]” See http://www.dfs.ny.gov/about/press/pr1204261.htm. “Early findings of the

investigation suggest that 15 percent or more of premiums collected by force-placed insurers

flow to the banks through insurance agents affiliated with the banks.” See

www.dfs.ny.gov/about/press/pr1204051.htm.10

9 Shortly after the deposition testimony in Hofstetter became public (in March 2011), Chase entered into a multi-million dollar settlement (in July 2011), under which it agreed to disgorge 100% of the commissions that it received on force-placed flood insurance for eligible class members, and permanently refrain from accepting commissions in connection with force-placed flood insurance for HELOC borrowers. Following notice to the class members, that settlement received final approval from court on November 14, 2011. 10 CitiMortgage was one of the entities subpoenaed by the NYDFS, in addition to ASIC and Assurant. See Exhibit 19.


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62. The kickback arrangements between ASIC and its lender-partners are

unquestionably unjust.

63. Numerous courts have condemned this type of self-dealing in connection with

force-placed insurance. See, e.g., McNeary-Calloway, 2012 WL 1029502, at *23-29; Williams,

2011 WL 4901346, at *2, 4; Abels v. JPMorgan Chase Bank, N.A., 678 F. Supp. 2d 1273, 1278–

79 (S.D. Fla. 2009); Gipson, 232 F. Supp. 2d. at 707; Stevens v. Citigroup, Inc., No. CIV.A 00-

3815, 2000 WL 1848593, at *1, 3 (E.D. Pa. Dec. 15, 2000).

64. Moreover, the practice of accepting commissions in connection with force-placed

flood insurance is inconsistent with the NFIA, which only allows lenders and servicers to

“charge the borrower for the cost of premiums and fees incurred by the lender or servicer for the

loan in purchasing the insurance.” 42 U.S.C. § 4012(e)(2) (emphasis added); see also 12 C.F.R.

§ 22.3.

65. HUD also forbids such kickbacks and commissions in its Lender Guide, HUD

4155.2. See Exhibit 20. HUD’s Lender Guide expressly states that “[a]dvancing funds in

anticipation of commissions on sales being financed with FHA-insured mortgages is prohibited.”

Id. In addition, the Lender Guide states that “[a] lender is not permitted to pay any fee,

compensation, or thing of value other than for services actually performed, including kick back

fees[.]” Id.

66. In addition, Fannie Mae prohibits these type of kickback and commission

arrangements. On March 14, 2012, Fannie Mae issued a Servicing Guide Announcement

(“SGA”) pertaining to lender-paced insurance. See Exhibit 21. In the SGA, Fannie Mae

clarified its requirements relating to reasonable reimbursable expenses for lender-placed

insurance, and stated that “reimbursement of lender-placed insurance premiums must exclude


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any lender-placed insurance commission earned on that policy by the servicer or any related

entity[.]” Id. at 4 (emphasis in original).

67. Earlier that same month, on March 6, 2012, Fannie Mae issued a Request for

Proposal (“RFP”) relating to lender-placed insurance. See Exhibit 22.11 In the RFP, Fannie Mae

stated that it had conducted an “extensive internal review” of the lender-placed insurance

process, and found that the process “can be improved through unit price reductions and fee

transparency to the benefit of both the taxpayers and homeowners.” Id. at 2. In particular,

Fannie Mae made the following observations:

“Lender Placed Insurers often pay commissions/fees to Servicers for placing business with them. The cost of such commissions/fees is recovered in part or in whole by the Lender Placed Insurer from the premiums[.]”

“The existing system may encourage Servicers to purchase Lender Placed Insurance from Providers that pay high commissions/fees to the Servicers and provide tracking, rather than those that offer the best pricing and terms . . . . Thus, the Lender Placed Insurers and Servicers have little incentive to hold premium costs down.”

“[M]uch of the current lender placed insurance cost borne by Fannie Mae results from an incentive arrangement between Lender Placed Insurers and Servicers that disadvantages Fannie Mae and the homeowner.”

Id. Thus, Fannie Mae sought to “[r]estructure the business model to align Servicer incentives

with the best interest of Fannie Mae and homeowners.” Id. at 3. Among other things, Fannie

Mae sought to “[e]liminate the ability of Servicers to pass on the cost of commissions/fees to

Fannie Mae” and “[s]eparate the commissions and fees for Insurance Tracking Services from the

fees for Lender Placed Insurance to ensure transparency and accountability.” Id. at 2.

11 The RFP was labeled “Confidential” by Fannie Mae, but subsequently was published in American Banker magazine. See Jeff Horwitz, Fannie Mae Seeks to Break up Force-Placed Market, Document Shows, AMERICAN BANKER, May 24, 2012, available at www.americanbanker.com/issues/177_101/fannie-rfp-gse-contracting-document-1049630-1.html.


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68. Two months later, the “NYDFS held three days of public hearings in May 2012

regarding the force-placed insurance practices of several mortgage lenders, servicers, and

insurance companies. See http://www.dfs.ny.gov/insurance/hearing/fp_052012_schedule.htm.

On the opening day of the hearings, NYDFS Superintendent Benjamin Lawsky issued a

statement announcing that “our initial inquiry into the operation of the force placed insurance

market has raised a number of serious concerns and red flags.” See Exhibit 23 at 2. Among

other things, Superintendent Lawsky noted that:

there . . . appears to be a web of tight relationships between the banks, their subsidiaries and insurers that have the potential to undermine normal market incentives and may contribute to other problematic practices. In some cases this takes the form of large commissions being paid by insurers to the banks for what appears to be very little work.

Id. Superintendent Lawsky further stated that “[t]his perverse incentive, if it exists, would

appear to harm both homeowners and investors while enriching the banks and the insurance

companies.” Id. at 3. Following these hearings, the NYDFS asked lender-placed insurance

companies in New York (including ASIC) to submit new rate filings.

69. These concerns are by no means limited to regulators in New York. In fact, the

National Association of Insurance Commissioners (“NAIC”) recently expressed similar

“regulatory concern”:

A key regulatory concern with the growing use of lender-placed insurance is “reverse competition,” where the lender chooses the coverage provider and amounts, yet the consumer is obligated to pay the cost of coverage. Reverse competition is a market condition that tends to drive up prices to the consumers, as the lender is not motivated to select the lowest price for coverage since the cost is born by the borrower. Normally competitive forces tend to drive down costs for consumers. However, in this case, the lender is motivated to select coverage from an insurer looking out for the lender’s interest rather than the borrower.

Exhibit 24. As a result, the NAIC announced that it will hold its own public hearing relating to

force-placed insurance on August 9, 2012. Id.


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Midland Mortgage Force-Places More Excessive Flood Insurance Coverage on Mr. Casey and Receives Its Own Kickback through FirstInsure

70. Shortly after imposing increased flood insurance requirements on Mr. Casey,

Citibank transferred his mortgage to Midland, which demanded even more flood insurance

coverage for the property.

71. Specifically, on December 23, 2011, Midland sent Mr. Casey a Notice of

Insufficient Flood Insurance Coverage (“First Midland Letter”) claiming that “[a] review of your

flood insurance coverage indicates that your property is not adequately insured in the event of a

loss.” See Exhibit 25.

72. In this letter, Midland acknowledged that Mr. Casey was not obligated “[b]y law”

to maintain flood insurance in excess of his outstanding principal balance, but stated that

Midland requires “100-percent Replacement Cost Value” coverage, up to the National Flood

Insurance Program maximum of $250,000. Based on this purported requirement, which is not

contained in Mr. Casey’s mortgage or other loan documents, Midland determined that “the

minimum required flood coverage for [Plaintiff’s] property should be $237,349.”

73. This coverage amount was approximately fourteen times Mr. Casey’s outstanding

principal balance, and was not required as a condition of his loan. Nevertheless, Midland stated

that it would purchase additional flood insurance coverage for Mr. Casey’s property if he did not

meet this new requirement.

74. On January 23, 2012, Midland sent Mr. Casey a Second Notice of Insufficient

Flood Insurance Coverage (“Second Midland Letter”). See Exhibit 26. In this letter, Midland

claimed that “[t]here is a problem with the FLOOD insurance on your home[,]” and demanded

that Mr. Casey increase his flood coverage amount to $237,349 within fifteen days.


19

75. On February 9, 2011, Midland sent Casey a Notice of Purchase of Lender Placed

Flood Policy Due to Insufficient Coverage Amount (“Third Midland Letter”). See Exhibit 27.

In this form letter, Midland announced that it had purchased $49,049 in additional flood

insurance coverage for Mr. Casey’s property -- beyond his existing coverage level of $188,300 --

but also curiously stated that “the minimum flood coverage for your property should be $0.”

76. The cost of this force-placed flood insurance coverage ($154.12) was charged to

Mr. Casey’s mortgage escrow account and built into his monthly mortgage payment. As a result

of this force-placed flood insurance coverage and the increased coverage that Mr. Casey already

had obtained (which also was paid out of his escrow account), he is now paying $1,478.12 per

year in flood insurance on his mortgage loan, and his monthly payments have skyrocketed to

$757.30 to make up for the resulting escrow “shortage.” See Exhibit 28.

77. This unwarranted, unnecessary, and excessive flood insurance has placed a

crushing financial burden on Mr. Casey, and he has barely managed to make the increased

monthly payment amount that became effective in May 2012. Unless Midland changes its policy

or is ordered to do so, it is likely that Mr. Casey will be unable to continue making these

increased payments and may lose his home.

78. Mr. Casey’s predicament recently was the subject of a lengthy investigative

article in the Syracuse Post-Standard. See Exhibit 29. In this article, a Midland spokesperson

declined to budge from Midland’s onerous flood insurance requirement, stating that Midland

insists on replacement cost coverage “to ensure that if the property sustained a total loss that our

interests would be protected and the property rebuilt.”

79. This explanation defies common sense. Midland’s financial interest in Mr.

Casey’s property is limited to recovering his outstanding principal balance, and Midland has no


20

right whatsoever to demand additional flood insurance coverage in excess of the amount required

by the NFIA, HUD, or the terms of Mr. Casey’s mortgage.

80. Midland did not force-place additional flood insurance coverage on Mr. Casey’s

property to protect its legitimate financial interests, or out of concern for Casey. Rather, Midland

force-placed this increased flood insurance coverage because it was financially lucrative for it to

do so. Midland’s form letters expressly acknowledge that “[a]n affiliate of Midland, FirstInsure,

earns a commission on, and/or derives other income from, premiums from lender placed flood

insurance.”

CLASS ACTION ALLEGATIONS

81. Plaintiffs bring this action as a class action pursuant to Rule 23 of the Federal

Rules of Civil Procedure.

Proposed Classes Regarding Citigroup

82. Plaintiffs assert their breach of contract/breach of covenant of good faith and fair

dealing claim against Citigroup (Count 1) and Plaintiff Skinner asserts his TILA claim against

Citigroup (Count 6) on behalf of a proposed Citigroup Over-Insured Class defined as follows:

Proposed Citigroup Over-Insured Class: All persons with residential mortgages originated, acquired and/or serviced by any Citigroup Defendant and who, within the applicable statutes of limitations, were forced by any Citigroup Defendant to pay for flood insurance which exceeded the lesser of the following: (1) $250,000; (2) the replacement cost value of the property pledged as security for the loan; or (3) the total outstanding loan balance, but excluded from this class are Defendants, their affiliates, subsidiaries, agents, board members, directors, officers, and employees.


21

83. Plaintiffs assert their unjust enrichment claim against Citigroup (Count 2) on

behalf of a proposed Citigroup Lender-Placed Class defined as follows:12

Proposed Citigroup Lender-Placed Class: All persons in the United States who were charged for lender-placed flood insurance by Citigroup during the applicable limitations period.

84. Plaintiffs assert their breach of fiduciary duty/breach of trust claims (Count 3) and

conversion claims (Count 4) against Citigroup on behalf of a proposed Citigroup Escrow

Subclass defined as follows:

Proposed Citigroup Escrow Sub-Class: All persons in the Citigroup Over-Insured Class or Lender-Placed Class whose lender placed insurance premiums were escrowed by Citigroup.

85. Plaintiff Casey asserts his NYDPA claim against Citigroup (Count 5) on behalf of

a proposed Citigroup New York Subclass defined as follows:

Proposed Citigroup New York Subclass: All persons in the Citigroup Over-Insured Class or the Citigroup Lender-Placed Class whose mortgage loan or line of credit with Citigroup was secured by real property in the State of New York, and who were subject to Citigroup’s flood insurance requirements and/or had lender-placed flood insurance coverage purchased for their property by Citigroup on or after May 17, 2009.

Proposed Classes Regarding Midland

86. Plaintiff Casey asserts his breach of contract/breach of covenant of good faith and

fair dealing claim against Midland (Count 7) and TILA claim against Midland (Count 12) on

behalf of a proposed Midland Over-Insured Class defined as follows:

Proposed Midland Over-Insured Class: All persons with residential mortgages originated, acquired and/or serviced by Midland and who, within the applicable statutes of limitations, were forced by any Defendant to pay for flood insurance which exceeded the lesser of the following: (1) $250,000; (2) the replacement cost value of the property pledged as

12 To the extent that Plaintiffs’ claim in Count One is based on allegations of unlawful kickbacks or commissions, this claim is also asserted on behalf of the proposed Citigroup Lender-Placed Class. Plaintiffs plead breach of contract and unjust enrichment as alternative theories.


22

security for the loan; or (3) the total outstanding loan balance, but excluded from this class are Defendants, their affiliates, subsidiaries, agents, board members, directors, officers, and employees

87. Plaintiff Casey asserts his unjust enrichment claim against Midland and

FirstInsure (Count 8) on behalf of a proposed Midland Lender-Placed Class defined as follows: 13

Proposed Midland Lender-Placed Class: All persons in the United States who were charged for lender-placed flood insurance by Midland during the applicable limitations period.

88. Plaintiff Casey asserts his breach of fiduciary duty/breach of trust claim against

Midland (Count 9) and conversion claim against Midland (Count 10) on behalf of a proposed

Midland Escrow Subclass defined as follows:

Proposed Midland Escrow Sub-Class: All persons in the Midland Over-Insured Class or the Lender-Placed Class whose lender placed insurance premiums were escrowed by Midland.

89. Plaintiff Casey asserts his NYDPA claim against Midland (Count 11) on behalf of

a proposed Midland New York Subclass defined as follows:

Proposed Midland New York Sub-Class: All persons in the Midland Over-Insured Class or the Midland Lender-Placed Class whose mortgage loan or line of credit with Midland was secured by real property in the State of New York, and who were subject to Midland’s flood insurance requirements and/or had lender-placed flood insurance coverage purchased for their property by Midland on or after May 17, 2009.

90. The defined Classes and Subclasses set forth above are collective referred to

herein as the “Classes.”

13 To the extent that Casey’s claim in Count Seven is based on allegations of unlawful kickbacks or commissions, this claim is also asserted on behalf of the proposed Midland Lender-Placed Class. Casey pleads breach of contract and unjust enrichment as alternative theories.


23

91. Numerosity: The Classes are so numerous that joinder of all Class members is

impracticable. During the relevant time period, thousands of Defendants’ customers satisfy the

definition of the proposed Classes.

92. Typicality: Plaintiffs’ claims are typical of the claims of members of the

Classes. Among other things: (1) Plaintiffs’ mortgage documents are typical of those of other

Class members in that Plaintiff Casey and Plaintiff Skinner have typical FHA and Fannie

Mae/Freddie Mac form mortgages used without substantial difference throughout the United

States; (2) the form letters that Plaintiffs received are typical of those form letters received by the

other Class members; (3) Defendants treated Plaintiffs consistent with other Class members in

accordance with Defendants’ uniform policies and practices; (4) it was typical for Defendants to

require mortgagors to purchase and maintain flood insurance coverage in amounts greater than

required by law, greater than required by their mortgage documents, and greater than required to

insure the amount of funds extended to them; and (5) it was typical for Defendants and/or their

affiliates to receive kickbacks, commissions or other compensation in connection with lender-

placed insurance.

93. Adequacy: Plaintiffs will fairly and adequately protect the interests of the

Classes, and have retained counsel experienced in complex class action litigation, including

flood insurance litigation. See, e.g., Hofstetter v. Chase Home Finance, LLC, No. 10-01313,

2011 WL 1225900 (N.D. Cal. Mar. 31, 2011) (finding counsel of record to be adequate and

appointing counsel as class counsel in class action lawsuit asserting similar claims).

94. Commonality: Common questions of law and fact exist as to the members of the

Classes and predominate over any questions solely affecting individual members of the Classes,

including, without limitation:


24

a. whether federal law requires Defendants’ customers in SFHAs to purchase

and/or maintain flood insurance in amounts greater than their outstanding principal balance;

b. whether HUD requires Defendants’ customers in SFHAs to purchase

and/or maintain flood insurance in amounts greater than their outstanding principal balance;

c. whether Fannie Mae/Freddie Mac require Defendants’ customers in

SFHAs to purchase and/or maintain flood insurance in amounts greater than their outstanding

principal balance;

d. whether Defendants have a pervasive policy and practice of requiring

unreasonable amounts of flood insurance in excess of federal requirements, HUD requirements

and Fannie Mae/Freddie Mac guidelines;

e. whether Defendants’ form letters are false, deceptive, and/or misleading;

f. whether the mortgage documents relied upon by Defendants authorize

Defendants to demand and/or force-place flood insurance in amounts greater than necessary to

secure the amount of funds extended;

g. whether Defendants breached their mortgage agreements with borrowers

by demanding unauthorized amounts of flood insurance or amounts that were not properly and

adequately disclosed upon origination of such borrowers’ loans or home equity credit lines;

h. whether Defendants owe their customers a duty of good faith and fair

dealing, and if so, whether Defendants breached this duty by, inter alia, (1) demanding flood

insurance in amounts greater than necessary to secure the amount of funds extended and greater

than required by federal law, HUD, or Fannie Mae/Freddie Mac; and (2) arranging for kickbacks

or commissions for themselves and/or their affiliates in connection with force-placed insurance;


25

i. whether Defendants owe their customers a fiduciary duty in connection

with mortgage escrow accounts, and if so, whether Defendants breached this duty by, inter alia,

(1) paying for excessive amounts of flood insurance coverage out of escrow; and (2) arranging

for kickbacks or commissions for themselves and/or their affiliates in connection with force-

placed insurance purchased out of escrow;

j. whether Defendants were unjustly enriched by their conduct;

k. whether Defendants conduct as described herein violates the NYDPA;

l. whether Defendants conduct as described herein violates the TILA;

m. the appropriateness and proper form of any declaratory or injunctive relief;

n. the appropriateness and proper measure of monetary and other damages

sustained by the Classes; and

o. the appropriateness and proper measure of statutory penalties and punitive

damages.

95. This case is maintainable as a class action under Fed. R. Civ. P. 23(b)(2) because

Defendants have acted or refused to act on grounds that apply generally to the Classes, so that

final injunctive relief or corresponding declaratory relief is appropriate respecting the Classes as

a whole.

96. Class certification is also appropriate under Fed. R. Civ. P. 23(b)(3) because

questions of law and fact common to the Classes predominate over any questions affecting only

individual members of the Classes, and because a class action is superior to other available

methods for the fair and efficient adjudication of this litigation. Defendants’ conduct described

in this Complaint stems from common and uniform policies and practices, resulting in

unnecessary flood insurance premiums and related charges that are readily calculable from


26

Defendants’ business records and other class-wide evidence. Members of the Classes do not

have an interest in pursuing separate individual actions against Defendants, as the amount of

each Class member’s individual claims is small compared to the expense and burden of

individual prosecution. Class certification also will obviate the need for unduly duplicative

litigation that may result in inconsistent judgments concerning Defendants’ practices. Moreover,

management of this action as a class action will not present any likely difficulties. In the

interests of justice and judicial efficiency, it would be desirable to concentrate the litigation of all

Class members’ claims in a single forum.

97. Plaintiffs intend to send notice to all members of the Classes to the extent required

by Rule 23 and with the approval of the Court. The names and addresses of the Class members

are available from Defendants’ records.

FIRST CLAIM FOR RELIEF

BREACH OF CONTRACT / BREACH OF COVENANT OF GOOD FAITH AND FAIR DEALING

(Asserted against Citigroup by Plaintiffs Casey and Skinner)

98. Plaintiffs allege and incorporate by reference the allegations in the preceding

paragraphs.

99. Plaintiff Casey’s mortgage is a standard form FHA mortgage.

100. Citibank was the lender-in-interest to Plaintiff Casey’s mortgage from 2002 (after

the mortgage was acquired by Citibank) until Citibank transferred its interest in the mortgage to

Midland in the second half of 2011. During this time, CitiMortgage serviced the mortgage on

behalf of Citibank.

101. Citigroup was bound by the terms of Plaintiff Casey’s mortgage during the time

that it held and serviced the mortgage. Citigroup was without power to set or change the flood

insurance requirements of Plaintiff Casey’s mortgage in a manner inconsistent with HUD’s


27

requirements, as the mortgage provides for insurance “against loss by floods to the extent

required by the Secretary” of HUD. See Exhibit 7, ¶ 4.

102. Plaintiff Skinner’s mortgage is a standard Fannie Mae/Freddie Mac form

mortgage. Citigroup was without power to set or change the flood insurance requirements of

Plaintiff Skinner’s mortgage in a manner inconsistent with Fannie Mae’s requirements since

Fannie Mae owns the loan and is the “Lender” as referred to in Plaintiff Skinner’s mortgage

contract, and its flood insurance requirements are controlling (and not those based on the

individual corporate policies of the servicing entity).

103. Plaintiffs’ mortgages do not require flood insurance coverage in an amount

greater than the amount of the outstanding principal balance.

104. Citigroup breached the terms of Plaintiffs’ mortgages by requiring Plaintiffs to

obtain and maintain flood insurance in excess of the amount required under the mortgages, and

by force-placing flood insurance in excess of the amount required under the mortgages.

105. Citigroup also breached the terms of Plaintiffs’ mortgages by accepting

commissions or kickbacks in connection with force-placed flood insurance.

106. Plaintiff Casey’s mortgage provides that “Lender may collect fees and charges

authorized by the Secretary” of HUD. See Exhibit 7, ¶ 8. Kickbacks or commissions in

connection with force-placed insurance are not authorized by HUD. See Exhibit 20.

107. Plaintiff Skinner’s mortgage provides that “Lender may do and pay for whatever

is reasonable or appropriate to protect Lender’s interest in the property and rights under this

Security Instrument[.]” See Exhibit 7, ¶ 9. This language does not authorize Citigroup to

arrange for kickbacks or commissions for itself or its affiliates in connection with lender-placed


28

insurance. Payment of kickbacks or commissions to a loan servicer is neither appropriate nor

necessary to protect the lender’s legitimate interests or rights.

108. The foregoing breaches were not isolated. Citigroup similarly breached the

mortgage agreements of other Citigroup Class members by requiring them to obtain and

maintain flood insurance in excess of the amount required under their mortgage agreements, by

force-placing flood insurance in excess of the amount required under their mortgage agreements,

and or by accepting kickbacks or commissions in connection with force-placed flood insurance.

109. Citigroup also breached the implied covenant of good faith and fair dealing

inherent in Plaintiffs’ mortgages and the mortgages of other Citigroup Class members.

110. Citigroup owed Plaintiffs and the Citigroup Class members a duty of good faith

and fair dealing, by virtue of Citigroup’s contractual relationship with Plaintiffs and the Class

members.

111. Citigroup breached this duty by, among other things: (1) demanding and/or force-

placing flood insurance coverage in excess of the amount required by federal law and/or the

relevant mortgage documents, and in excess of the amount required to protect Citigroup’s

legitimate financial interests; (2) unreasonably exercising in bad faith any purported

discretionary authority Citigroup claims it was afforded under the loan and mortgage documents,

(3) imposing contractual requirements that did not exist or that exceeded the requirements

disclosed in the relevant loan and mortgage documents; and (4) arranging for kickbacks,

commissions, or other compensation for itself and/or its affiliates in connection with lender-

placed insurance.

112. Citigroup willfully engaged in the foregoing conduct in bad faith, for the purpose

of: (1) gaining unwarranted contractual and legal advantages; (2) unfairly and unconscionably


29

maximizing revenue from Plaintiffs and other Class members; and (3) generating commissions,

kickbacks, or other compensation for Citigroup and/or its affiliates.

113. The foregoing breaches were willful and not the result of mistake or inadvertence.

Citigroup systematically and pervasively required Plaintiffs and other Citigroup Class Members

to obtain flood insurance in excess of the amount required under their mortgage documents, in

excess of the amount required by federal law, and in excess of the amount that Citigroup could

fairly and reasonably demand in good faith. Citigroup also pervasively arranged for

commissions for itself and/or its affiliates in connection with lender-placed flood insurance.

114. As a direct result of Citigroup’s breaches of contract and breaches of the implied

covenant of good faith and fair dealing, Plaintiffs and the Citigroup Class members have been

injured, and have suffered actual damages and monetary losses, in the form of increased

insurance premiums, interest payments, and/or other fees and charges.

115. Plaintiffs and the Citigroup Class members are entitled to recover their damages

and other appropriate relief for the foregoing contractual breaches.

SECOND CLAIM FOR RELIEF

UNJUST ENRICHMENT



paragraphs.

117. Citigroup has been unjustly enriched as a result of the conduct described in this

Complaint and other inequitable conduct.

118. Citigroup received a benefit from Plaintiffs and other Citigroup Lender-Placed

Class members in the form of payment for force-placed flood insurance, and Citigroup and/or its

affiliates retained a portion of these payments as commissions or other compensation.


30

119. Retention of these payments by Citigroup would be unjust and inequitable. The

NFIA only allows lenders and servicers to “charge the borrower for the cost of premiums and

fees incurred by the lender or servicer for the loan in purchasing the insurance.” 42 U.S.C. §

4012(e)(2); see also 12 C.F.R. § 22.3. Moreover, HUD prohibits kickback or commission

arrangements in its Lender’s Manual, and these types of kickbacks or commissions are also

prohibited by Fannie Mae. For these reasons and the other reasons set forth above, Citigroup

abused its discretion to pass through costs for force-placed flood insurance, by charging

Plaintiffs and other Citigroup Lender-Placed Class members amounts in excess of the net costs

incurred by Citigroup for such insurance and by retaining at least a portion of the premium

payments as kickbacks, commissions or other compensation.

120. The kickbacks, commissions or other compensation that Citigroup and/or its

affiliates received in connection with force-placed flood insurance were not legitimately earned,

and came at the ultimate expense of Plaintiffs and members of the Citigroup Lender-Placed Class

who had insurance force-placed on them by Citigroup.

121. Because it would be unjust and inequitable for Citigroup and/or its affiliates to

retain such payments through their manipulation of the force-placed insurance process, Plaintiffs

and the Citigroup Lender-Placed Class are entitled to restitution of all monies unjustly and

inequitably retained. Citigroup cannot retain these payments in good conscience.

THIRD CLAIM FOR RELIEF

BREACH OF FIDUCIARY DUTY / BREACH OF TRUST



paragraphs.


31

123. Plaintiffs’ mortgages contain escrow provisions. In the FHA form mortgage,

Paragraph 2 provides the relevant terms. In the Fannie Mae/Freddie Mac mortgage, Paragraph 3

provides the relevant terms. These terms are standard and typical of other mortgages originated

and/or serviced by Citigroup.

124. Paragraph 2 of Plaintiff Casey’s mortgage provides that “Borrower shall include

in each monthly payment . . . premiums for insurance[,]” including flood and hazard insurance.

125. Paragraph 2 of Plaintiff Casey’s Mortgage further provides that the sums included

in his monthly payment for insurance premiums are to be held in escrow by his lender. These

funds are to be used for the purpose of paying his insurance premiums when due, and any excess

funds are to be returned to Casey under the terms of his mortgage.

126. Paragraph 3 of Plaintiff Skinner’s mortgage states “Borrower shall pay to Lender

on the day Periodic Payments are due under the Note, until the note is paid in full, a sum (the

“Funds”) to provide for payment of the amounts due for … premiums for any and all insurance

required by the Lender under Section 5 [governing required property insurance]…. These items

are called ‘Escrow Items’…. Borrower shall pay Lender the Funds for Escrow Items….”

Paragraph 3 of Plaintiff Skinner’s mortgage thus provides that the Funds for Escrow Items are to

be held in escrow by his lender.

127. Citigroup has accepted monies from Plaintiffs for insurance premiums on a

monthly basis and has held them in escrow, pursuant to the mortgage agreements.

128. Citigroup was obligated to hold these escrow funds in trust, and owed Plaintiffs a

fiduciary duty with respect to the handling of such funds.

129. Citigroup breached its fiduciary duty to Plaintiffs and other members of the

Citigroup Escrow Subclass: (1) by unilaterally using escrow funds to purchase flood insurance


32

that Plaintiffs and other Subclass members did not want and were not required to obtain; and (2)

by profiting from force-placed insurance policies that were purchased from escrow funds at the

expense of Plaintiffs and other Subclass members.

130. These actions were undertaken by Citigroup in bad faith for its own benefit and

were not intended to benefit Plaintiffs or other borrowers.

131. As a direct result of Citigroup’s actions, Plaintiffs and the Citigroup Escrow

Subclass have suffered injury in the form of unnecessary and excessive escrow charges, a loss of

funds from their escrow accounts, increased mortgage payments due to alleged escrow

“shortages,” and related injuries.

132. Plaintiffs and the Citigroup Escrow Subclass are entitled to damages for

Citigroup’s beaches of its fiduciary obligations and misappropriation of escrow funds. In

addition, Plaintiffs and the Citigroup Escrow Subclass are entitled to punitive damages because

Citigroup acted in bad faith in deliberate and/or reckless disregard of their rights and its

obligation to hold their escrow funds in trust.

FOURTH CLAIM FOR RELIEF

CONVERSION



paragraphs.

134. Citigroup had and continues to have a duty to maintain and preserve customers’

mortgage accounts, and mortgage escrow accounts, and to prevent their diminishment or

alteration through its own wrongful acts.

135. Citigroup wrongfully and intentionally collected insurance premiums from

customers’ mortgage escrow accounts or added such payments to customers’ mortgage accounts.


33

136. Citigroup collected these premiums by wrongfully and intentionally withdrawing

specific and readily identifiable funds from mortgage customers’ escrow accounts or

misappropriating funds paid to customers’ account balances for their regular monthly mortgage

payments in order to fund its force-placed insurance scheme.

137. Citigroup has assumed and exercised the right of ownership over these funds

without authorization to do so and in hostility to the rights of Plaintiffs and the Citigroup Escrow

Subclass without legal justification.

138. Citigroup has retained these funds unlawfully without the consent of Plaintiffs

and the Citigroup Escrow Subclass and has deprived them from exercising control over the

funds.

139. Citigroup intends to permanently deprive Plaintiffs and the Citigroup Escrow

Subclass of these funds.

140. Plaintiffs and the Citigroup Escrow Subclass properly own these funds, not

Citigroup, who now claims that it is entitled to ownership of the funds contrary to the rights of

Plaintiffs and the Citigroup Escrow Subclass.

141. Plaintiffs and the Citigroup Escrow Subclass are entitled to the immediate

possession of these funds.

142. Citigroup has wrongfully converted these specific and readily identifiable funds.

143. Citigroup’s wrongful conduct is of a continuing nature.

144. As a direct and proximate result of Citigroup’s wrongful conversion, Plaintiffs

and the Citigroup Escrow Subclass have suffered and continue to suffer damages. Plaintiffs and

the Citigroup Escrow Subclass are entitled to recover from Citigroup all damages and costs


34

permitted, including all amounts that Citigroup wrongfully converted, which are specific and

readily identifiable.

FIFTH CLAIM FOR RELIEF

VIOLATION OF NEW YORK DECEPTIVE PRACTICES ACT (“NYDPA”) N.Y. Gen. Bus. Law § 349, et seq.

(Asserted against Citigroup by Plaintiff Casey)

145. Plaintiff Casey alleges and incorporates by reference the allegations in the

preceding paragraphs.

146. Citigroup was required to adhere to the requirements of the NYDPA when

conducting business with Mr. Casey and other Citigroup New York Subclass members.

Citigroup provided credit and related services to Mr. Casey and the members of the Citigroup

New York Subclass for personal, family, and/or household purposes.

147. The NYDPA provides that “deceptive acts or practices in the conduct of any

business, trade, or commerce, or in the furnishing of any service in this state are hereby declared

unlawful.”

148. Citigroup pervasively violated the NYDPA during the relevant period, and

continues to violate this statute, by virtue of the unfair, deceptive, and fraudulent practices

described herein.

149. Among other things, Citigroup violated the NYDPA by:

a) illegitimately demanding and force-placing excessive and unnecessary

flood insurance on property owned by Mr. Casey and other Citigroup New York Subclass

members, in amounts greater than required by law, greater than Citigroup’s financial interest,

and contrary to the amounts agreed upon in their borrower agreements;


35

b) fraudulently and deceptively misrepresenting the amount of flood

insurance that Mr. Casey and the other New York Subclass members are required to maintain

under their mortgage agreements and/or federal law;

c) materially misrepresenting to Mr. Casey and the Citigroup New York

Subclass members that federal law and/or their mortgages conferred obligations on them that

they did not have;

d) unfairly and deceptively arranging for secret kickbacks, commissions,

or other compensation for itself and/or its affiliates in connection with force-placed insurance

purchased for Mr. Casey and other Citigroup New York Subclass members;

e) deceptively charging Mr. Casey and other Citigroup New York

Subclass Members amounts in excess of the net costs incurred for force-placed insurance;

and

f) engaging in other unconscionable and deceptive conduct as set forth in

the Complaint.

150. Citigroup engaged in such violations for the purpose of: (1) unfairly and

unconscionably maximizing revenue from Mr. Casey and other Citigroup New York Subclass

members; (2) generating commissions, kickbacks, or other compensation for Citigroup and/or its

affiliates; (3) gaining unwarranted contractual and legal advantages; and (4) inducing and/or

forcing Mr. Casey and other Citigroup New York Subclass members to procure unnecessary

and/or excessive amounts of insurance.14

14 Plaintiff Casey and the Citigroup New York Subclass reasonably and justifiably relied on Citigroup to (among other things) fully, honestly, and fairly disclose the amount of insurance that was required for their property under their mortgages and federal law, and to interpret and/or apply such requirements reasonably and fairly in good faith.


36

151. Citigroup willfully engaged in such conduct and knew that it violated the NYDPA

or showed reckless disregard for whether it violated the NYDPA.

152. As a result of Citigroup’s violations of the NYDPA, Mr. Casey and the Citigroup

New York Subclass have been injured and have suffered actual damages and monetary losses in

the form of increased insurance premiums, interest payments, and/or other fees and charges.

153. Mr. Casey and the Citigroup New York Subclass members are entitled to actual

damages, statutory damages, treble damages, injunctive relief, attorneys’ fees and costs, and any

other remedies available under the NYDPA or in equity, for Citigroup’s violations of the

NYDPA. See N.Y. Gen. Bus. Law § 349(h).

SIXTH CLAIM FOR RELIEF

VIOLATION OF THE TRUTH IN LENDING ACT

(15 U.S.C. § 1601, et seq.)

(Asserted against Citigroup by Plaintiff Skinner)

154. Plaintiff Skinner alleges and incorporates by reference the allegations in the


155. Residential mortgage loan agreements are subject to the disclosure requirements

of the Truth in Lending Act (“TILA”), 15 U.S.C. § 1601 et seq., and all related regulations,

commentary, and interpretive guidance promulgated by the Federal Reserve Board.

156. Citigroup is a “creditor” as defined by the TILA.

157. Under the TILA, Citigroup is required to accurately and fully disclose the terms

of the legal obligation between the parties. See 12 C.F.R. § 226.17(c)(1) (“The disclosures shall

reflect the terms of the legal obligation between the parties.”). This duty to make truthful and

accurate disclosures is an ongoing duty, and applies to both subsequent disclosures and initial

disclosures at the time of the loan transaction. See Hubbard v. Fidelity Fed. Bank, 91 F.3d 75,

79 & n.7 (9th Cir. 1996) (rejecting defendant’s argument that 12 C.F.R. § 226.17(c) “only


37

applies to disclosures before consummation of the transaction”); Demando v. Morris, 206 F.3d

1300, 1303 (9th Cir. 2000) (“Because the Notice contained terms that were in violation of the

credit agreement, the Notice violated Regulation Z.”).

158. Citigroup violated TILA by misrepresenting to Mr. Skinner and other Citigroup

Over-Insured Class members that they were required to purchase flood insurance in amounts

greater than required under their mortgage agreements and greater than necessary to secure their

outstanding principal balance. See Wulf v. Bank of Am., N.A., 798 F. Supp. 2d 586, 597-99 (E.D.

Pa. June 27, 2011) (“Wulf I”) (magistrate opinion) (denying motion to dismiss borrower’s claims

for violation of the TILA, based on “Defendant’s departure from the mortgage documentation”

by force-placing flood insurance in excess of the amount required by Plaintiff’s mortgage);

accord, Gooden v. SunTrust Mortg., Inc., 2012 WL 996513, at *4-5 (E.D. Cal. Mar. 23, 2012)

(finding Plaintiff stated valid TILA claim that Defendant force-placed unauthorized hazard

insurance that exceeded the amount required in the loan agreement); Travis v. Boulevard Bank,

N.A., 880 F. Supp. 1226, 1230 (N.D. Ill. 1995) (finding TILA violation as “the result of

Defendant’s departure from the contract”).

159. In addition, Citigroup violated the TILA by, inter alia: (i) adversely changing the

terms of mortgage loans after origination without consent and demanding more insurance than

previously required in amounts greater than necessary to protect its interest in the property; and

(ii) failing to provide proper notice, after origination, that Citigroup was amending the terms of

loans as described in the relevant mortgage documents. See Hofstetter v. Chase Home Fin., LLC,

751 F. Supp. 2d, 1116, 1123-28 (N.D. Cal. 2010) (upholding claim that “the bank violated the

requirements of the TILA by adversely changing, without authorization or providing proper

notice to the borrower, the terms of the HELOCs in question via [] flood insurance ‘form


38

letters’”); Wulf I, 798 F. Supp. 2d at 599-600 (“Plaintiff's TILA claim survives the motion to

dismiss. . . . Plaintiff's TILA claim is based on the change in flood insurance requirements[.]”)

160. The TILA violations set forth above occurred within one year of the

commencement of this action. To the extent that the violations described above occurred earlier,

Mr. Skinner did not discover and did not have a reasonable opportunity to discover Citigroup’s

violations until Citigroup notified him that it was necessary for him to increase his flood

insurance coverage because his existing coverage allegedly was deficient. Prior to this time, Mr.

Skinner had no reason or opportunity to complain about any TILA violations by Citigroup.

161. Mr. Skinner’s TILA claim is timely. The statute of limitations on his TILA claim

did not begin to run and/or was equitably tolled until such time that he had a reasonable

opportunity to discover Citigroup’s TILA violations and complain about such violations. It

would be manifestly unjust and inconsistent with the purposes of TILA to apply and enforce an

earlier accrual date for Mr. Skinner’s TILA claim.

162. Citigroup systematically and pervasively engaged in similar violations of TILA to

the detriment of other members of the Citigroup Over-Insured Class.

163. Mr. Skinner and the Citigroup Over-Insured Class have been injured and have

suffered a monetary loss as a result of Citigroup’s violations of TILA. Pursuant to the terms of

Mr. Skinner’s form mortgage, the unauthorized charges for flood insurance were added to his

loan balance, are accruing interest. See Exhibit 1, ¶9 (“Any amounts disbursed by Lender . . .

shall become additional debt of Borrower secured by this Security Instrument. These amounts

shall bear interest at the Note rate from the date of disbursement[.]”)


39

164. As a result of Citigroup’s violations, Mr. Skinner and the Citigroup Over-Insured

Class are entitled to recover actual damages and a penalty of $500,000 or 1% of Citigroup’s net

worth, as provided by 15 U.S.C. § 1640(a)(1)-(2).

165. Plaintiff Skinner and the Citigroup Over-Insured Class also are entitled to

recovery of attorneys’ fees and costs to be paid by Citigroup, as provided by 15 U.S.C. §

1640(a)(3).

SEVENTH CLAIM FOR RELIEF

BREACH OF CONTRACT / BREACH OF COVENANT OF GOOD FAITH AND FAIR DEALING

(Asserted against Midland by Plaintiff Casey)



167. Mr. Casey’s mortgage is a standard form FHA mortgage.

168. Midland has been the lender-in-interest to Mr. Casey’s mortgage and has serviced

the mortgage from the time it acquired the mortgage in 2011 until the present date.

169. Midland is bound by the terms of the mortgage.

170. Mr. Casey’s mortgage does not require flood insurance coverage in an amount

greater than the amount of his outstanding principal balance.

171. Midland breached the terms of Mr. Casey’s mortgage by requiring him to obtain

and maintain flood insurance in excess of the amount required under his mortgage, and by force-

placing flood insurance in excess of the amount required under his mortgage.

172. Midland also breached the terms of Mr. Casey’s mortgage by arranging for

commissions or kickbacks in connection with force-placed flood insurance.


40

173. Plaintiff Casey’s mortgage provides that “Lender may collect fees and charges

authorized by the Secretary” of HUD. See Exhibit 7, ¶ 8. Kickbacks or commissions in

connection with force-placed insurance are not authorized by HUD. See Exhibit 20.

174. The foregoing breaches were not isolated. Midland similarly breached the

mortgage agreements of other Midland Class members by requiring them to obtain and maintain

flood insurance in excess of the amount required under their mortgage agreements, by force-

placing flood insurance in excess of the amount required under their mortgage agreements, and

or by arranging for kickbacks or commissions in connection with force-placed flood insurance.

175. Midland also breached the implied covenant of good faith and fair dealing

inherent in Mr. Casey’s mortgage and the mortgages of other Midland Class members.

176. Midland owed Mr. Casey and the Midland Class members a duty of good faith

and fair dealing, by virtue of Midland’s contractual relationship with Mr. Casey and other Class

members.

177. Midland breached this duty by, among other things: (1) demanding and/or force-

placing flood insurance coverage in excess of the amount required by federal law or the relevant

mortgage documents, and in excess of the amount required to protect Midland’s legitimate

financial interests; (2) unreasonably exercising in bad faith any purported discretionary authority

Midland claims it was afforded under the loan and mortgage documents, (3) imposing

contractual requirements that did not exist or that exceeded the requirements disclosed in the

relevant loan and mortgage documents; and (4) arranging for kickbacks, commissions, or other

compensation for its affiliate in connection with lender-placed insurance.

178. Midland willfully engaged in the foregoing conduct in bad faith, for the purpose

of: (1) gaining unwarranted contractual and legal advantages; (2) unfairly and unconscionably


41

maximizing revenue from Mr. Casey and other Class members; and (3) generating commissions,

kickbacks, or other compensation for Midland or its affiliates.

179. The foregoing breaches were willful and not the result of mistake or inadvertence.

Midland systematically and pervasively required Mr. Casey and other Midland Class members to

obtain flood insurance in excess of the amount required under their mortgage documents, in

excess of the amount required by federal law, and in excess of the amount that Midland could

fairly and reasonably demand in good faith. Midland also pervasively arranged for commissions

for itself or its affiliate, FirstInsure, in connection with lender-placed flood insurance.

180. As a direct result of Midland’s breaches of contract and breaches of the implied

covenant of good faith and fair dealing, Mr. Casey and the Midland Class members have been

injured, and have suffered actual damages and monetary losses, in the form of increased

insurance premiums, interest payments, and/or other charges.

181. Plaintiff Casey and the Midland Class members are entitled to recover their

damages and other appropriate relief for the foregoing contractual breaches.

EIGHTH CLAIM FOR RELIEF

UNJUST ENRICHMENT

(Asserted against Midland and FirstInsure by Plaintiff Casey)



183. Midland and/or its affiliate, FirstInsure, have been unjustly enriched as a result of

the conduct described in this Complaint and other inequitable conduct.

184. Midland received a benefit from Mr. Casey and the Midland Lender-Placed Class

members in the form of payments for force-placed flood insurance coverage, and Midland and/or

FirstInsure retained a portion of these payments as commissions or other compensation.


42

185. Retention of these payments by Midland or FirstInsure would be unjust and

inequitable. The NFIA only allows lenders and servicers to “charge the borrower for the cost of

premiums and fees incurred by the lender or servicer for the loan in purchasing the insurance.”

42 U.S.C. § 4012(e)(2); see also 12 C.F.R. § 22.3. Moreover, HUD prohibits kickback or

commission arrangements in its Lender’s Manual, and these types of kickbacks or commissions

are also prohibited by Fannie Mae. For these reasons and the other reasons stated above,

Midland abused its discretion to pass through costs for force-placed flood insurance, by charging

Mr. Casey and other Midland Lender-Placed Class members amounts in excess of the net costs

incurred by Midland for such insurance, and it was improper for Midland and/or FirstInsure to

retain at least a portion of the premium payments as kickbacks, commissions or other

compensation.

186. The kickbacks, commissions or other compensation that Midland and/or its

affiliate, FirstInsure, received in connection with force-placed flood insurance were not

legitimately earned, and came at the ultimate expense of Mr. Casey and the members of the

Midland Lender-Placed Class who had flood insurance force-placed on them by Midland.

187. Because it would be unjust and inequitable for Midland and/or FirstInsure to

retain such payments through their manipulation of the force-placed insurance process, Mr.

Casey and the Midland Lender-Placed Class are entitled to restitution of all monies unjustly and

inequitably retained. Midland and FirstInsure cannot retain these payments in good conscience.

NINTH CLAIM FOR RELIEF

BREACH OF FIDUCIARY DUTY / BREACH OF TRUST





43

189. Mr. Casey’s mortgage contains an escrow provision in Paragraph 2 of the

mortgage, which is typical of other mortgages originated and/or serviced by Midland.

190. Paragraph 2 of Mr. Casey’s mortgage provides that “Borrower shall include in

each monthly payment . . . premiums for insurance[,]” including flood and hazard insurance.

191. Paragraph 2 of Mr. Casey’s Mortgage further provides that the sums included in

his monthly payment for insurance premiums are to be held in escrow by his lender. These funds

are to be used for the purpose of paying his insurance premiums when due, and any excess funds

are to be returned to Casey under the terms of his mortgage.

192. Midland has accepted monies from Mr. Casey for insurance premiums on a

monthly basis and has held them in escrow, pursuant to Paragraph 2 of his mortgage.

193. Midland was obligated to hold these escrow funds in trust, and owed Mr. Casey a

fiduciary duty with respect to the handling of such funds.

194. Midland breached its fiduciary duty to Mr. Casey and other members of the

Midland Escrow Subclass: (1) by unilaterally using escrow funds to purchase flood insurance

that Plaintiff and other Subclass members did not want and were not required to obtain; and (2)

profiting from force-placed insurance policies that were purchased from escrow funds at the

expense of Mr. Casey and other Subclass members.

195. These actions were undertaken by Midland in bad faith for its own benefit and

were not intended to benefit Mr. Casey or other borrowers.

196. As a direct result of Midland’s actions, Mr. Casey and the Midland Escrow

Subclass have suffered injuries in the form of unnecessary and excessive escrow charges, a loss

of funds from their escrow accounts, increased mortgage payments due to alleged escrow

“shortages,” and related injuries.


44

197. Plaintiff Casey and the Midland Escrow Subclass are entitled to damages for

Midland’s beaches of its fiduciary obligations and misappropriation of escrow funds. In

addition, Mr. Casey and the Midland Escrow Subclass are entitled to punitive damages because

Midland acted in bad faith in deliberate and/or reckless disregard of their rights and its obligation

to hold their escrow funds in trust.

TENTH CLAIM FOR RELIEF

CONVERSION



paragraphs.

199. Midland had and continues to have a duty to maintain and preserve customers’

mortgage accounts, and mortgage escrow accounts, and to prevent their diminishment or

alteration through its own wrongful acts.

200. Midland wrongfully and intentionally collected insurance premiums from

customers’ mortgage escrow accounts or added such payments to customers’ mortgage accounts.

201. Midland collected these premiums by wrongfully and intentionally withdrawing

specific and readily identifiable funds from mortgage customers’ escrow accounts or

misappropriating funds paid to customers’ account balances for their regular monthly mortgage

payments in order to fund its force-placed insurance scheme.

202. Midland has assumed and exercised the right of ownership over these funds

without authorization to do so and in hostility to the rights of Mr. Casey and the Midland Escrow

Subclass without legal justification.

203. Midland has retained these funds unlawfully without the consent of Mr. Casey

and the Midland Escrow Subclass and has deprived them from exercising control over the funds.


45

204. Midland intends to permanently deprive Mr. Casey and the Midland Escrow

Subclass of these funds.

205. Mr. Casey and the Midland Escrow Subclass properly own these funds, not

Midland, who now claims that it is entitled to ownership of the funds contrary to the rights of

Mr. Casey and the Midland Escrow Subclass.

206. Mr. Casey and the Midland Escrow Subclass are entitled to the immediate

possession of these funds.

207. Midland has wrongfully converted these specific and readily identifiable funds.

208. Midland’s wrongful conduct is of a continuing nature.

209. As a direct and proximate result of Midland’s wrongful conversion, Mr. Casey

and the Midland Escrow Subclass have suffered and continue to suffer damages. Mr. Casey and

the Midland Escrow Subclass are entitled to recover from Midland all damages and costs

permitted, including all amounts that Midland wrongfully converted, which are specific and

readily identifiable.

ELEVENTH CLAIM FOR RELIEF

VIOLATION OF NEW YORK DECEPTIVE PRACTICES ACT (“NYDPA”) N.Y. Gen. Bus. Law § 349, et seq.




211. Midland was required to adhere to the requirements of the NYDPA when

conducting business with Mr. Casey and other Midland New York Subclass Members. Midland

provided credit and related services to Mr. Casey and the members of the Midland New York

Subclass for personal, family, and/or household purposes.


46

212. The NYDPA provides that “deceptive acts or practices in the conduct of any

business, trade, or commerce, or in the furnishing of any service in this state are hereby declared

unlawful.”

213. Midland pervasively violated the NYDPA during the relevant period, and

continues to violate this statute, by virtue of the unfair, deceptive, and fraudulent practices

described herein.

214. Among other things, Midland violated the NYDPA by:

a) illegitimately demanding and force-placing excessive and unnecessary

flood insurance on property owned by Mr. Casey and other Midland New York Subclass

members, in amounts greater than required by law, greater than Midland’s financial interest,

and contrary to the amounts agreed upon in their borrower agreements;

b) fraudulently and deceptively misrepresenting the amount of flood

insurance that Mr. Casey and the other New York Subclass are required to maintain under

their mortgage agreements;

c) materially misrepresenting to Mr. Casey and other Midland New York

Subclass members that their mortgages conferred obligations on them that they did not have;

d) deceptively charging Mr. Casey and other Midland New York

Subclass Members amounts in excess of the net costs incurred for force-placed insurance;

e) deceptively suggesting that it was a legitimate business practice for

Midland to arrange for commissions on force-placed insurance through its affiliate,

FirstInsure; and

f) engaging in other unconscionable and deceptive conduct as set forth in

the Complaint.


47

215. Midland engaged in such violations for the purpose of: (1) unfairly and

unconscionably maximizing revenue from Mr. Casey and other Midland New York Subclass

members; (2) generating commissions, kickbacks, or other compensation for Midland and/or

FirstInsure; (3) gaining unwarranted contractual and legal advantages; and (4) inducing and/or

forcing Mr. Casey and other Midland New York Subclass members to procure unnecessary

and/or excessive amounts of flood insurance.15

216. Midland willfully engaged in such conduct and knew that it violated the NYDPA

or showed reckless disregard for whether it violated the NYDPA.

217. As a result of Midland’s violations of the NYDPA, Mr. Casey and the Midland

New York Subclass have been injured and have suffered actual damages and monetary losses in

the form of increased insurance premiums, interest payments, and/or other fees and charges.

218. Plaintiff Casey and the Midland New York Subclass members are entitled to

actual damages, statutory damages, treble damages, injunctive relief, attorneys’ fees and costs,

and any other remedies available under the NYDPA or in equity, for Midland’s violations of the

NYDPA. See N.Y. Gen. Bus. Law § 349(h)

TWELFTH CLAIM FOR RELIEF

VIOLATION OF THE TRUTH IN LENDING ACT

(15 U.S.C. § 1601, et seq.)




15 Plaintiff Casey and the Midland New York Subclass reasonably and justifiably relied on Midland to, inter alia, fully, honestly and fairly disclose the amount of insurance that was required for their property under their mortgages and federal law, and to interpret and/or apply such requirements reasonably and fairly in good faith.


48

220. Residential mortgage loan agreements are subject to the disclosure requirements

of the Truth in Lending Act (“TILA”), 15 U.S.C. § 1601 et seq., and all related regulations,

commentary, and interpretive guidance promulgated by the Federal Reserve Board.

221. Midland is a “creditor” as defined by the TILA.

222. Under the TILA, Midland is required to accurately and fully disclose the terms of

the legal obligation between the parties. See 12 C.F.R. § 226.17(c)(1) (“The disclosures shall

reflect the terms of the legal obligation between the parties.”). This duty to make truthful and

accurate disclosures is an ongoing duty, and applies to both subsequent disclosures and initial

disclosures at the time of the loan transaction. See Hubbard v. Fidelity Fed. Bank, 91 F.3d 75,

79 & n.7 (9th Cir. 1996) (rejecting defendant’s argument that 12 C.F.R. § 226.17(c) “only

applies to disclosures before consummation of the transaction”); Demando v. Morris, 206 F.3d

1300, 1303 (9th Cir. 2000) (“Because the Notice contained terms that were in violation of the

credit agreement, the Notice violated Regulation Z.”).

223. Midland violated TILA by misrepresenting to Mr. Casey and other Midland Over-

Insured Class members that they were required to purchase flood insurance in amounts greater

than required under their mortgage agreements and greater than necessary to secure their

outstanding principal balance. See Wulf I, 798 F. Supp. 2d at 597-99 (denying motion to dismiss

FHA borrower’s claims for violation of the TILA, based on “Defendant’s departure from the

mortgage documentation” by force-placing insurance in excess of the amount required by

Plaintiff’s mortgage); accord, Gooden, 2012 WL 996513, at *4-5; Travis, 880 F. Supp. at 1230.

224. In addition, Midland violated the TILA by, inter alia: (i) adversely changing the

terms of mortgage loans after origination without consent and demanding more insurance than

previously required in amounts greater than necessary to protect its interest in the property; and


49

(ii) failing to provide proper notice, after origination, that Midland was amending the terms of

loans as described in the relevant mortgage documents. See Hofstetter v. Chase Home Fin., LLC,

751 F. Supp. 2d, 1116, 1123-28 (N.D. Cal. 2010) (upholding claim that “the bank violated the

requirements of the TILA by adversely changing, without authorization or providing proper

notice to the borrower, the terms of the HELOCs in question via [] flood insurance ‘form

letters’”); Wulf I, 798 F. Supp. 2d at 599-600 (“Plaintiff's TILA claim survives the motion to

dismiss. . . . Plaintiff's TILA claim is based on the change in flood insurance requirements[.]”)

225. The TILA violations set forth above occurred within one year of the

commencement of this action. To the extent that the violations described above occurred earlier,

Mr. Casey did not discover and did not have a reasonable opportunity to discover Midland’s

violations until Midland notified him on December 23, 2011 that it was necessary for him to

increase his flood insurance coverage because his existing coverage allegedly was deficient.

Prior to this time, Mr. Casey had no reason or opportunity to complain about any TILA

violations by Midland.

226. Mr. Casey’s TILA claim is timely. The statute of limitations on his TILA claim

did not begin to run and/or was equitably tolled until such time that he had a reasonable

opportunity to discover Midland’s TILA violations and complain about such violations. It would

be manifestly unjust and inconsistent with the purposes of TILA to apply and enforce an earlier

accrual date for Mr. Casey’s TILA claim.

227. Midland systematically and pervasively engaged in similar violations of TILA to

the detriment of other members of the Midland Over-Insured Class.

228. Mr. Casey and the Midland Over-Insured Class have been injured and have

suffered a monetary loss as a result of Midland’s violations of TILA. Pursuant to the terms of


50

Mr. Casey’s FHA form mortgage, the unauthorized charges for flood insurance were added to his

loan balance, are accruing interest. See Exhibit 7, ¶7 (“Any amounts disbursed by Lender . . .

shall become an additional debt of the Borrower secured by this Security Instrument. These

amounts shall bear interest from the date of disbursement, at the Note rate[.]”).

229. As a result of Midland’s violations, Mr. Casey and the Midland Over-Insured

Class are entitled to recover actual damages and a penalty of $500,000 or 1% of Midland’s net

worth, as provided by 15 U.S.C. § 1640(a)(1)-(2).

230. Plaintiff Casey and the Midland Over-Insured Class also are entitled to recovery

of attorneys’ fees and costs to be paid by Midland, as provided by 15 U.S.C. § 1640(a)(3).

PRAYER FOR RELIEF

WHEREFORE, Plaintiffs, individually and on behalf of the Classes, pray for relief as

follows:

a) Determining that this action may proceed as a class action under Rules

23(b)(2) and (b)(3) of the Federal Rules of Civil Procedure;

b) Designating Plaintiffs as representative for the Classes;

c) Designating Plaintiffs’ counsel as counsel for the Classes;

d) Issuing proper notice to the Classes at Defendants’ expense;

e) Declaring that Defendants breached the terms of Plaintiffs’ mortgages and

the mortgages of other Over-Insured Class members, and breached its duty of good faith and fair

dealing to Plaintiffs and other Over-Insured Class members;

f) Declaring that Defendants’ conduct was inequitable and that Defendants

were unjustly enriched by such conduct;


51

g) Declaring that Defendants breached their fiduciary duties to Plaintiffs and

the Escrow Subclass members, and wrongfully converted their escrow funds;

h) Declaring that Defendants’ actions violated the NYDPA;

i) Declaring that Defendants’ actions violated the TILA;

j) Determining that Defendants acted willfully in deliberate or reckless

disregard of applicable law and the rights of Plaintiffs and Class members;

k) Awarding appropriate equitable relief, including but not limited to an

injunction requiring Defendants to reverse all unlawful, unfair, or otherwise improper charges for

flood insurance coverage, allowing customers to close loans or credit lines without first paying

premiums for insurance that was not necessary or required by law, prohibiting Defendants from

imposing unfair and unlawful flood insurance requirements on borrowers, prohibiting

Defendants and their affiliates from earning commissions or other compensation on force-placed

insurance policies, and ordering Defendants to cease and desist from engaging in further

unlawful conduct in the future;

l) Awarding actual damages, applicable statutory damages, treble damages,

punitive damages, penalties, and interest;

m) Awarding reasonable attorneys’ fees and costs and expenses; and

n) Granting other and further relief, in law or equity, as this Court may deem

appropriate and just.

DEMAND FOR JURY TRIAL

Pursuant to Rule 38(b) of the Federal Rules of Civil Procedure, Plaintiffs and the Classes

demand a trial by jury.


52

Dated: July 26, 2012 Respectfully submitted, NICHOLS KASTER, PLLP

/s/ Donald H. Nichols Donald H. Nichols, Bar Roll No. 515017 Kai Richter, MN Bar No. 0296545* E. Michelle Drake, MN Bar No. 0387366* *(admitted pro hac vice) 4600 IDS Center 80 South Eighth Street Minneapolis, MN 55402 Telephone: (612) 256-3200 Fax: (612) 215-6870 Email: [email protected] [email protected] [email protected]

Shanon J. Carson** Sarah R. Schalman-Bergen**

Patrick F. Madden** **(pro hac vice applications forthcoming) BERGER & MONTAGUE, P.C. 1622 Locust Street Philadelphia, PA 19103 Telephone: (215) 875-4656 Facsimile: (215) 875-4604 Email: [email protected]

[email protected] [email protected]

Brett Cebulash ** Kevin S. Landau**

**(pro hac vice applications forthcoming) TAUS, CEBULASH & LANDAU, LLP 80 Maiden Lane, Suite 1204 New York, NY 10038 Telephone: (212) 931-0704 Facsimile: (212) 931-0703 Email: [email protected]

[email protected]

ATTORNEYS FOR PLAINTIFFS


Exhibit 1

Case 5:12-cv-00820-DNH-DEP Document 21-1 Filed 07/26/12 Page 1 of 18

Exhibit 2


Exhibit 3


Exhibit 4


Exhibit 5


Exhibit 6


Exhibit 7


Exhibit 8


Exhibit 9


Exhibit 10


Exhibit 11


Exhibit 12


Exhibit 13


Exhibit 14


Exhibit 15


Exhibit 16


Exhibit 17


Case3:1 0-cv-01313-WHA Document160 Filed03/09/11 Page64 of 182

In The Matter Of:

SHEILA I. HOFSTETTER v.

CHASE HOME FINANCE, LLC, et al.

DANIEL WHEELER January 11, 2011

MERRILL CORPORATION

920 Second Ave Soutb Sulte.Hti

Minneabolls. MNi554o2 Phone: 877-489~0367


Case3:1 0-cv-01313-WHA Document160 Filed03/09/11 Page65 of 182

IN THE UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

SHEILA I. HOFSTETTER,

individually, as a

representative of the class,

and on behalf of the general

public,

Plaintiff,

-vs-

CHASE HOME FINANCE, LLC,

JPMORGAN CHASE BANK, N.A.,

and DOES 1 through 50,

inclusive,

Defendants.

CONFIDENTIAL

CV-10-1313 WHA

Page 1

The Rule 30(b) (6) deposition of Chase Home

Finance and JPMorgan Chase Bank, corporate designee,

DANIEL WHEELER, taken before CAROL CONNOLLY, CSR, CRR,

and Notary Public, pursuant to the Federal Rules of Civil

Procedure for the United States District Courts

pertaining to the taking of depositions, at 330 North

Wabash, Chicago, Illinois, commencing at 9:03 a.m. on the

11th day of January, A.D., 2011.


Case3:10-cv-01313-WHA Document160 Filed03/09/11 Page82 of 182

CONFIDENTIAL DANIEL WHEELER - 1/11/2011

Page 66

1 payment of commissions to Chase. Legal counsel had full 2 knowledge of the commission arrangement. Their 3 involvement in the negotiations of the contract would 4 have been around the contract terms and conditions. 5 Q How about anybody else on the Chase side other 6 than you and legal counsel involved in the negotiations 7 process? 8 A Could have been Hamid Tari. 9 Q How about Mr. Nack and Terry Smith?

10 A No, definitely not. 11 Q Would they have been aware of the commission? 12 A We never--13 MR. MEINERTZHAGEN: Object to the form. 14 THE WITNESS: We never address commission 15 arrangements with servicing. There's always been an 16 arm's length between commission before the outsourcing 17 agreements and the revenue agreements or agency 18 agreements. 19 MR. RICHTER: Q So if we did a search of e-mails 20 and files of Mr. Nack and Mr. Smith and other people at 21 Chase Home Finance, would you expect that there would be 22 nothing in their e-mails and correspondence files and 23 other files relating to the amount of the commission? 24 MR. MEINERTZHAGEN: Object to the form. 25 THE WITNESS: That would be my expectation. Clearly

Page 67

1 they were not involved in negotiating any commission 2 arrangement, nor did they have any input into the agency 3 agreement, nor would they have been provided with copies 4 of the agency agreement. 5 MR. RICHTER: Q Could you describe the 6 negotiations process relating to the agency agreement? 7 A What we did with lender-placed flood was to 8 look at what the industry was doing. It's a standard 9 industry-wide practice for an industry to be paid

1 0 commissions for business written by an insurance carrier. 11 We sought out peer insurance carriers of Assurant, top 12 tier players and also secondary market players to get a 13 sense for what the commission rates were being paid on 1 4 that line of business. 15 Chase, you know -- our position on this going 16 back to 2007 was that, you know, we wanted no more 1 7 commission than the average that was being paid in the 1 8 industry. And the average was around 20 percent. It was 19 as high as 40 percent, 20, 25, some were taking a little 2 0 bit less, some taking a little bit more, but that's what 2 1 we based the 20 percent. The 20 percent had been in 2 2 place prior to 2007 so that was not a newly negotiated 2 3 rate. We simply said we're going to renew the contracts 2 4 and, you know, we are going to renew it at 20 percent 2 5 commission rate.

Page 68

1 Q Were there drafts of the agency agreement 2 exchanged between the parties prior to its finalization? 3 A Between JP Morgan Insurance Agency, legal 4 counsel and the other parties to the agreement, yes, 5 Q And were there also meetings related to the 6 terms? 7 A Not likely. 8 Q Telephone conferences? 9 A Not likely.

10 Q How about e-mails or correspondence? 11 A No. There would have been dialogue that I 12 would have had with Assurant and -- very little dialogue 13 around flood commission in 2007, that is, what they have 14 been paying, that's what we agree to have them, you know, 15 pay us with the new te1m. 16 Q How far back had that 20 percent commission 17 been in place on force-placed flood policies? 18 A As long as I've managed the program, so it goes 19 back at least 10 years. 20 Q That 20 percent premium, that applied on all 21 lender-placed flood policies issued by ASIC for Chase 22 under the Compliance PLUS Insurance Agreement, correct? 23 A When you say ASIC you're referring to both 24 parties of the agreement, also Standard Guaranty, 25 correct?

Page 69

1 Q Yes. 2 A I just want clarity on that. It was not a 20 3 percent premium surcharge -- maybe I misheard you, It 4 was a 20 percent commission that was paid to the licensed 5 agency entity based upon premium writings, 20 percent of 6 the premium writings. It was not an add-on. 7 Q My question just had to do with which policies 8 did it apply to. So let me rephrase. Did it apply to 9 all of the lender-placed flood policies issued under

1 0 Exhibit 46, the Compliance PLUS Insurance Agreement? 11 A Yes, it would have.

12 Q So again both loans and lines, first and second 13 lien position, the whole universe? 14 A Yes. 15 Q How much money did JP Morgan Insurance Agency, 16 and subsequently Chase Insurance Agency, earn per year on 17 force-placed flood commissions in '07, '08, '09? 18 MR. MEINERTZHAGEN: Objection, outside the scope. 1 9 He can testify to the extent he knows with respect to 2 0 HELOCs or home equity loans, otherwise, he can testify in 21 his own -- based on his own personal knowledge. 2 2 THE WITNESS: I couldn't specifically address going 2 3 back to -- if the year was '06 through '09 for all of 2 4 flood. For HELOCs and -- that would include loans and 2 5 Jines, in 2009 it was approximately I ,4 million. 2008 it

18 (Pages 66 to 69)

612-338-1181 Merrill Corporation - Minnesota

www.merrillcorp.com/law


Exhibit 18


Exhibit 19


Under InterrogationJAN 27, 2012 5:03pm ET

Law enforcement officials have issued subpoenas to the following companies as part of an

investigation into the sale of force-placed insurance. Consumers who have outstanding

loans for homes and other property are often required to buy force-placed coverage after

allowing their own policies to lapse. Government officials suspect vendors may have gouged

consumers in the sale of force-placed policies. Their main focus is mortgages, but

investigators are also looking into auto and other types of force-placed loan coverage,

according to a source familiar with the investigation.

Subpoenas to Mortgage Servicers

Citimortgage, Inc.

Ocwen Financial Corporation

Greenpoint Mortgage Funding, Inc.

HSBC Mortgage Services Inc.

Saxon Mortgage Services, Inc.

Morgan Stanley Mortgage Capital Holdings LLC

Residential Capital LLC

Residential Funding Company, LLC

Nationstar Mortgage LLC

Aurora Loan Services LLC

PennyMac Corp.

Select Portfolio Servicing, Inc.

Green Tree Servicing LLC

Emigrant Mortgage Company, Inc.

PHH Mortgage Corporation

Dovenmuehle Mortgage, Inc.

American Home Mortgage Servicing, Inc.

SunTrust Bank

Subpoenas to Insurers

Allinco

Alpine Indemnity (PNC)

American Bankers Insurance Company of Florida

American Security Insurance Company

Assurant, Inc.


American Modern Home Insurance Company

American Modern Select Insurance Company

Banc One Insurance

Colonial American Casualty and Surety Company

Balboa Insurance Company

HSBC Insurance of Delaware

Meritplan Insurance Company

QBE Insurance Corporation

QBE Financial Institution Risk Services, Inc.

StarNet Insurance Company

WM Mortgage Reinsurance (JPMorgan Chase & Co. Captive Reinsurance)

Yosemite Insurance Co (Springleaf)

Zurich American Insurance Company

Subpoenas to Insurance Producers

AHMSI Insurance Agency Inc.

Banc of America Insurance Agency

BB&T Insurance Agency Services

Capital One Agency LLC

Chase Insurance Agency Inc.

Citi Assurance Agency

GMAC Agency Marketing

HSBC Insurance Agency Inc.

HSBC Insurance of Delaware

MetLife Auto & Home Insurance Agency Inc.

PNC Insurance Services LLC

Regions Insurance Agency

Southwest Business Corporation

Springleaf Financial Services of New York Inc.

SunTrust Insurance Services Inc.

Wells Fargo Insurance Agency

Wells Fargo Insurance Services of New York Inc.

Wells Fargo Insurance Services USA Inc.

Wells Fargo Special Risks Inc.

Wilshire National Insurance Agency

© 2012 American Banker and SourceMedia, Inc. All Rights Reserved. SourceMedia is an Investcorp company. Use, duplication, or sale of this service, or data contained herein, except as described in the Subscription Agreement, is strictly prohibited.


Exhibit 20


Ch·aptcr 6, ~cction A BUD 4155.2

4 .. :P;rohibited 'Payments .and Loans

Inti:otlu:ction

Change .. Date

· · · 4155~2 6.A.4.n · !Pay.in,g

Uncal'ncd· Fees

4155.2:,6.A.4.b P.rohibition •on Funds kd~ances

This topic contains information. on pt•oh1bited payments and loans, including

• paying ·unearned fees • prohibitfon on funds advances, an4 • providing below mat~ket ·tate Ol' non"lnterest loans.

December 23, 20'1 0

A tender is not petrnitted to pay any fee, compensationt or thing ef value other than, fo'l' services .actually performed, including

• kick back fees • fees above that actually paid .for the service • finders fees or payments .to any party referring the loan • ·payment to a par.ty that has received, or will J.'eoeive other payment for the

·service; .unless itis a comrnis·s.i-011 for selHng a hazard insurance policy at the 'botT0wer's .request, and . ·

·• fees prohibited by the Rea:l Estate Settlement Procedures .Act (RESPA).

Adv.ancin,g. funds in anticipation. of commissions on sales being financed with F~A~irisu~·ed moti;gages 'is· pt:ohibite~.

Continued on next page


Exhibit 21


" 0< 'v -' " ) \, ) '<'" A~

fl l?anni€Ma~ ~ . . . . .' . : . : . . . : :. . ,.; "' ~~

Servicing Guide Announcement SVC-2012-04 March 14, 2012

Updates to Lender-Placed Property Insurance and Hazard Insurance Claims Processing

Many borrowers are experiencing significantly increased costs for lender-placed hazard insurance premiums. Not only are lender-placed hazard insurance premiums more expensive than borrower-purchased hazard insurance premiums, but the cost of lender-placed policies may impact the borrowers' ability to reinstate their delinquent mortgage loans.

The Servicing Guide, Part II, Chapter 6: Lender-Placed Property Insurance, requires servicers to ensure that adequate hazard insurance coverage is in place at all times. If the servicer is unable to obtain evidence that the borrower has acceptable hazard insurance for a property, the servicer must obtain lender-placed coverage (also known as "force-placed" insurance) to protect Fannie Mae's interests.

With this Announcement, Fannie Mae is amending and clarifying its policies regarding the use, coverage requirements, deductibles, carrier eligibility requirements, and allowable reimbursable expenses for lenderplaced insurance. In addition, Fannie Mae is providing additional guidance to servicers for submitting property insurance claims to the insurance provider and remitting outstanding insurance funds to Fannie Mae after a mortgage loan is liquidated due to a foreclosure sale or a deed-in-lieu of foreclosure.

This Announcement addresses the following topics:

• Effective Date

• Lender-Placed Insurance Coverage Amount and Deductible Requirements

• Borrower Communications

• Notifying Borrower of Lender-Placed Insurance

• Lender-Placed Insurance and Retention Offers

• Acceptable Lender-Placed Insurance Carriers

• Borrower Refunds of Lender-Placed Insurance Premiums

• Acceptable Lender-Placed Insurance Costs and Insurance Tracking Fees

• Lender-Placed Hazard and Flood Insurance Losses

• Advancing Payment for Borrower's Property Insurance

• Hazard Insurance Claims and Remittances to Fannie Mae

• Filing of Insurance Claims for Damages Found from Property Inspections

• Remitting Outstanding Insurance Loss Drafts

• Reporting to Fannie Mae's Property Recovery Firm

© 2012 Fannie Mae. Trademarks of Fannie Mae. SVC-2012-04 Page 1


Effective Date

Servicing Guide, Part II, Chapter 6: Lender-Placed Property Insurance

The lender-placed in~urance requirements described in this Announcement will be added as new sections in Part II, Chapter 6 of the Servicing Guide. Unless otherwise indicated, servicers are required to implement the revised requirements in this Announcement no later than June 1, 2012.

Lender-Placed Insurance Coverage Amount and Deductible Requirements

Fannie Mae is amending and clarifying its requirements related to the amount of lender-placed insurance coverage as shown below:

• For mortgage loans that are current to 119 days delinquent, the insurance coverage amount should be issued at the borrower's last known coverage amount.

• For mortgage loans that are currently 120 days or more delinquent or for those loans that become 120 days delinquent after the effective date of this Announcement, the insurance coverage amount must be changed to the lesser of:

• the unpaid principal balance (UPB) or

• 100% of the insurable value of the improvements (as established by the property insurer).

The servicer may use the last known coverage amount for the borrower's property insurance in lieu of the insurable value of the improvements.

Examples: Determining the amount of lender-placed insurance coverage:

Loan 119 or Less Days Loan 120 Days or More Delinquent Delinquent

Property A Property B Property A ~ropertyB

Insurable Value/ $ 90,000 $100,000 $ 90,000 $100,000 Coverage Amount

UPB $105,000 $85,000 $105,000 $85,000

Required Coverage $90,000 $100,000 $ 90,000 $85,000 Amount

Servicers should not change the lender-placed insurance coverage amount based on the borrower becoming 120 days or more delinquent if the borrower is actively participating in one of the following foreclosure prevention alternative solutions:

• The mortgage loan is in a forbearance plan or repayment plan and the borrower is meeting the terms of the forbearance plan or repayment plan.

• The borrower is in a Trial Period Plan and is satisfying all the requirements of the Trial Period Plan.

• The borrower has submitted a complete Borrower Response Package for consideration of a foreclosure prevention alternative and the servicer is actively evaluating or has an offer pending with the borrower for a foreclosure prevention solution.

If the borrower fails to meet the terms of any of these foreclosure prevention alternative solutions, the servicer must immediately use the new lender-placed insurance coverage requirements noted above.



In addition, if the servicer becomes aware that the property has damage that may be covered under the existing insurance policy, the policy coverage amounts must not be changed until the claim has been submitted.

Fannie Mae is also changing its deductible requirement for all mortgage loans with lender-placed insurance. The allowable deductible per loss occurrence for insurance covering a property is:

• $1,000 if the face amount of the policy is $100,000 or less or

• $2,500 for all other insurance policy coverage amounts.

• When a policy provides for a separate wind-loss deductible (either in the policy itself or in a separate endorsement), that deductible must be 2% of the face amount of the policy.

The lender-placed insurance coverage must remain in force until the borrower can provide evidence of acceptable insurance coverage or the mortgage loan liquidates.

For lender-placed insurance, Fannie Mae requires a comprehensive, all perils or all risk policy, excluding personal property.

Fannie Mae is not changing its flood insurance coverage or deductible requirements for a mortgage loan secured by a property located in a Special Flood Hazard Area.

Borrower Communications

Notifying Borrower of Lender-Placed Insurance

Fannie Mae is changing the requirement that the servicer must contact the borrower at least once by letter before placement of any lender-placed insurance coverage. With this Announcement, the servicer must contact the borrower at least twice by letter prior to obtaining lender-placed insurance coverage. In addition, the servicer must notify the borrower in writing when it is required to change the lender-placed insurance coverage amount due to the delinquent status of the mortgage loan.

Servicers are reminded that all communications regarding lender-placed insurance must comply with all applicable federal and state laws.

Lender-Placed Insurance and Retention Offers

When offering the borrower a home retention option, servicers must remind borrowers of the benefits of borrower purchased insurance coverage when compared to lender-placed insurance.

Borrowers should be advised that lender-placed insurance may not provide the borrower coverage for personal property or contents and lender-placed insurance coverage may only cover the outstanding unpaid principal of a loan and may not provide enough coverage to rebuild the borrower's home in the case of a total loss. Lastly, servicers must advise borrowers that lender-placed insurance is in most cases more expensive than voluntary insurance coverage.

Acceptable Lender-Placed Insurance Carriers

Servicers must ensure that the lender-placed insurance carriers they use are filed and admitted in every state in which they service loans for Fannie Mae. For carriers and lender-placed programs that do not meet this requirement, Fannie Mae will allow the use of excess and surplus lines coverage during the filing period, up to a maximum of 180 days from the date of this Announcement.

The lender-placed vendor selected by the servicer must have premium rates that are competitively priced and commercially reasonable. The servicer must have a documented process in place that demonstrates that the



vendor meets this requirement. Fannie Mae reserves the right to require that a servicer change its lenderplaced insurance provider if the provider has not demonstrated its ability to file rates within a timely manner.

Borrower Refunds of Lender-Placed Insurance Premiums

Effective immediately, Fannie Mae is changing its requirement regarding the timing of lender-placed insurance refunds to the borrower. Lender-placed insurance premium refunds must occur within 15 days of receipt of evidence of acceptable insurance coverage from the borrower.

Acceptable Lender-Placed Insurance Costs and Insurance Tracking Fees

Fannie Mae is clarifying its requirement for reasonable reimbursable expenses for lender-placed insurance. Any servicer request for reimbursement of lender-placed insurance premiums must exclude:

• any lender-placed insurance commission earned on that policy by the servicer or any related entity,

• costs associated with insurance tracking or administration, or

• any other costs beyond the actual cost of the lender-placed insurance policy premium.

Lender-Placed Insurance and Coinsurance

Lender-placed insurance master policies may not contain a coinsurance clause or any other provision that yields the same result as a coinsurance clause.

Lender-Placed Hazard and Flood Insurance Losses

Servicing Guide, Part II, Section 501: Insurance Claim Settlements and Section 501.01: Disposition of Insurance Proceeds Other Than for Natural Disasters

When a loan has lender-placed insurance and the servicer discovers that the borrower is unable to complete repairs because he or she is financially unable to pay the amount of the insurance deductible, Fannie Mae now requires the servicer to advance the short fall in funds up to (or equal to) the amount of the deductible for the repairs. Servicers may obtain reimbursement by submitting a Cash Disbursement Request (Form 571 ). The servicer must then closely monitor the filing of the proof of loss claim with the insurance carrier, the repairs to the property, and the disbursement of the insurance proceeds.

Servicers are reminded if the property sustains losses that are uninsured, per the Servicing Guide, Part II, Section 502: Uninsured Losses, they should:

• determine the extent of the damage,

• secure the property, if it is abandoned,

• develop plans for repairing the property, and

• submit a Report of Hazard Insurance Loss (Form 176), when applicable ..

Advancing Payment for Borrower's Property Insurance

Servicing Guide, Part Ill, Section 103: Escrow Deposit Accounts; Section 103.04: Advances to Cover Expenses; and Part II, Section 201: Payment of Insurance Premiums

As part of a servicer's responsibility for protecting Fannie Mae's interest in the security property, it must ensure that hazard insurance (including flood insurance, if required), under the terms specified in Fannie Mae's



Guides, is in place at all times. Servicers are reminded that when a mortgage loan payment includes escrows, they must advance funds for the timely payment of the borrower's property insurance premiums.

Additionally, when the servicer has waived the escrow deposit account for a specific borrower, it remains responsible for the timely payment of the insurance premiums. Therefore, if the borrower fails to pay a premium, the servicer must advance its own funds to pay the past due premium and reinstate the borrower's insurance coverage, revoke the waiver, and begin escrow deposit collections to pay future premiums.

The servicer must establish an escrow deposit account in accordance with the Servicing Guide immediately. Furthermore, the servicer must have procedures that document and provide evidence of their efforts to attempt to reinstate the borrower's insurance coverage when the servicer is notified of the cancelation. Lender-placed insurance coverage should only be issued after the servicer has exhausted all means to keep the borrower's insurance policy in force.

Hazard Insurance Claims and Remittances to Fannie Mae

The following requirements apply to all Fannie Mae mortgage loans and are effective immediately.

Filing of Insurance Claims for Damages Found from Property Inspections

Servicing Guide, Part II, Chapter 5: Insurance Losses and Part II, Section 501: Insurance Claim Settlements

With this Announcement, Fannie Mae is clarifying its policy that when the servicer discovers a hazard or flood insurance loss during a property inspection or otherwise, the servicer must file an insurance claim if the borrower has not submitted a proof of loss claim. If the property inspection reveals a hazard or flood insurance loss and the proof of loss claim is not filed, is denied, or is curtailed due to the servicer's failure to file a timely claim, the servicer will be required to make Fannie Mae whole for any losses relating to the property damage expenses or fees incurred by Fannie Mae.

Remitting Outstanding Insurance Loss Drafts

Servicing Guide, Part VIII, Section 111: Hazard Insurance Coverage

Servicers must remit to Fannie Mae the remaining balance of any insurance loss drafts that the servicer is maintaining on a mortgage loan that is liquidated through foreclosure or a deed-in-lieu within 30 days of issuing the REOgram®. The servicer may not use any insurance loss draft proceeds to pay fees to the servicer's property recovery firm or any other servicer expenses. All insurance funds are to be forwarded to Fannie Mae.

In addition, if Fannie Mae's property recovery firm submits a proof of loss claim and the servicer receives the insurance loss draft, the funds must be wired to Fannie Mae within 10 business days of receipt by the servicer.

Reporting to Fannie Mae's Property Recovery Firm

Servicing Guide, Part VIII, Section 111: Hazard Insurance Coverage

The Servicing Guide currently requires that when Fannie Mae uses a property recover firm, the servicer will be responsible for providing all requested information or documentation to that property recovery firm within 10 days. With this Announcement, Fannie Mae is requiring that the servicer provide all requested information or documentation to the property recovery firm within three business days.

*****



Servicers should contact their Servicing Consultant, Portfolio Manager, Investor Reporting Business Analyst, or Fannie Mae's National Servicing Organization's Servicing Solutions Center at 1-888-FANNIE5 (1-888-326-6435) with any questions regarding this Announcement.

Gwen Muse-Evans Vice President Chief Risk Officer for Credit Portfolio Management



Exhibit 22


RFP Requirements and Response Template

~ Fa11nieMae.,

Request for Proposal Lender Placed Insurance Insurance Tracking Voluntary Insurance Lettering Program

March 6, 2012

Fannie Mae

3900 Wisconsin Avenue, NW Washington, DC 20016-2892

www.fanniemae.com

. . · .. :

Fannie Mae Confidential

March 6, 2012

.. ·. '

Page 1 I ! I I .


RFP Requirements and Response Template March 6, 2012

Fannie Mae is a government-sponsored enterprise that was chartered by Congress to support liquidity, stability and affordability in the secondary mortgage market, where existing mortgage-related assets are purchased and sold. Fannie Mae's most significant activities Include: (1) providing market liquidity by securitizing mortgage loans originated by lenders in the primary mortgage market into Fannie Mae mortgage-backed securities; and (2) purchasing mortgage loans and mortgage-related securities In the secondary market for Fannie Mae's mortgage portfolio. Fannie Mae acquires funds to purchase mortgage-related assets for Fannie Mae's mortgage portfolio by issuing a variety of debt securities In the domestic and International capital markets.

As a federally chartered corporation with extensive capital market participation, Fannie Mae is subject to extensive regulation, supervision and examination by the Federal Housing Finance Agency (FH FA) and by other federal agencies, including Treasury, the Department of Housing and Urban Development {"HUD"), and the Securities and Exchange Commission ("SEC"). The conservatorship Fannie Mae has bean under since September 2008, with FHFA acting as conservator, has no specified termination date.

As a best practice Fannie Mae seeks to reduce expenses while improving service quality. After extensive internal review, Fannie Mae believes that current Lender Placed hisurance costs are not market competitive and can be improved through unit price reductions and fee transparency to the benefit of both the taxpayers and homeowners. Therefore, Fannie Mae is undertaking this competitive procurement process to improve the pricing and fee transparency for Lender Placed Insurance while maintaining coverage and service quality.

Current Situation Fannie Mae's current Lender Place.d Insurance situatlor! is as follows:

1. Homeowners are required to maintain voluntary hazard insurance on Fannie Mae insured properties.

~. · . Lande~ placed .Insurance must be acquired by mortgage Setvicers when a property Is no longer eligible for ·Voluntary Insurance, or when the Servicer cannot obtain proof of adequate Voluntary Insurance from the homeowner, Irrespective of whether or not that homeowner is current or delinquent on the loan. . ·

3. · ·The cost·of Lender Placed Insurance is higher than the cost of voluntary· hazard insurance. Homeowners are billed for the Lender Placed Insurance-premiums. However,-if the homeowner does. not pay the premium -(for example, if the property has already been vacated), then Servlcets ·pass on the premium ·costs to Fannie Mae. · · ·

4. seniid~rs.:are re~.ponslble for p~ovidlng tracking.ser:vi~es, per Fannie Mae Gulci.ellnes. Many large S~rvlcih·have . chosen to.outsource ~he Insurance trapking and associated administrative process to third parties, the largest of which are affiliated with Lender Placed Insurers.

5.. · .. Lender Placed Insurers oft~n pay commlsslonsifees to Seryicers for placing ~usiness' wit~ the~. The cost.of. such · .· commissionsifees is racovered in part or.in whole ·i;ly the Lender Placed Insurer from the preml!,.!ms, w~lch the ·

· Servlcers pass on to F~nnie Mae. · · ·

6. ·:'The existlng·system may encourage 8ervicers to purchase Lender Placed Insurance from Providers that pay high commis,sions/fees t() the Servlcers and provida. tr?tcklng, rather. than thOSE! that .o.ffe.r the. best pricing and terms t.o .. Fann.le Mae. Thus, the Lender Placad Insurers and Servicers have little Incentive to hold premium costs down. hi .

. adqhion, .Fannie Mae is often.paying twice for Insurance Tracking services; once via the s~rv.icing fee that Fannie 'lvfae pays to. Servlcers, and again via the Lender Placed Insurance premiums, since those premiums may ·Include or subsidize· the costs of tracking services (tci ·t~e e.xtent.that Insurers are providing such services). · ·

In appropriate oircumstances, Lender Placed Insurance Is necessary and important to the preservation of Fannie Mae assets. However, much of the cu.rrentLander Placed lnsuranc.e cost borne by Fannie Mae results from an Incentive arrangement between Lender Placed Insurers and.Servlcers that disadvantages Fannie Mae and the homeowner. This RFP is designed to change this situation.

Expected Outcome . The expected outcome bf this procurement is for Servicers and Fannie Mae to'obtain competitively-priced Lender Placed Insurance ·that Incorporates price transparency and collaboration with Lender Placed Insurers. Fannie Mae expects to achiexe the .following:

. . ·. ~ . '• .

1 .. · Eliminate the ability of Servicers to pa~s. ~n the cost pf commissions/fees to Fanr_1ie Mae.

2. Eliminate the anility of Servicers to pass on the cost of Insurance Tracking services to Fannie Mae, since .the cost. for such services is reimbursed to·the Servlcer in the form pf current servicing fEH~S.~

Fannie Mae Confidential Page2

: . ~ : ..

· ......

I

I

I I·

I I


RFP Requirements and Response Template March 6, 2012 . .

3. Separate the commissions .and fees for Insurance. Tracking services from the fees for Lander Placed . Insurance to ensure transparency and accountabiiitY. . . . .

4. Require Servicers to order Lender Placed Insurance policies based on competitive pricing negotiated by · · Fannie Mae; Fannie Mae will choose one or more Providers based on .the responses received during the · RFP process. Ttie chosen Providers will be placed on a Preferred Provider List.

5. · Restructure the business model to align Servicer incentives with the best interests of Fannie Mae and homeowners. · · · ·

· 6. . Enforce best practices that encourage the use of voluntary insurance and reduce the demand for lander placed insurance.

. : . Fannie Maerecogni?:es that the current system developed over a perioq of. years. However, Fannie Mae is prepared to . restr!Jcture the curre.nt Lender Placed lnsurar)ce business model to operat~ as a market driven service that efficiently ITI~?ets the-best interests of Fannie Mae, Its partner Insurers, taxpayers, and homeowners.

Fannie Mae is confld.ent that the business model proposed herein .is tair to all parties,.allows 01arket•based pricing, . eliminates subsidies, and allows Fannie Mae to best meet its federal_charter to fa~ilitate home ownership, provide liquidity to the liousirig market; arid protect taxpayers.' Fannie Mae also believes that this new model is sustainable over time and robust enough.to adjust to changing conditions as the housing rnarket recovers •. The attributes ofthe new business model will be as follows:

1. The premiums to be charged for Lender Placed Insurance INill be negotiated between Fannie Mae and the Lender Placed lnsurer(s). These premiums will be communicated to Fannie Mae's Servicer community.

2. The Lender Placed lnsurer(s) will continue to invoice the Servicers for Insurance provided. Fannie Mae will . then reimb!Jrse·the Servicers, butwill·n6tpay more than the rate negotiated by Fannie Mae. The rate ··

negotiated between Fannie Mae and the Lender Placed lnsurer(s) will. e~clude any commissions paid by ·the Lender Placed lnsurer{s) to Fannie Mae Servlcers tc) place tlieidnsurance on Fannie Mae properties. In · addition the rate will exclude the cost of providing Insurance Tracking services or any other costs beyond the cost of the .policy premium to thE! $er.vi0er. · .

3. Ser\i!cers· may contract for Insurance Tra:ckfng and associated administrative services from a Lender Placed Insurer on the Preferred Provider List, perform tracking.seririces In-house, or outsourca tracking to a Provid~r nqt:on ~he llstsince the.Servlceris.fully liable for tracking costs. However, the full cost of such servlc~s must be billed independent of, and never embedded In, the insurance premiums charged for Lender Placed Insurance. Fannie Mae will not reimburse Servlcers for these tracking and administrative services. · ·· : · · · · · ·

4. ·Fannie Mae will reevaluate the Preferred Provider list from time to time as appropriate to ensure Fannie · · · Mae is receiving competitive pricing"> · · ·

This-~~~ bu~iness .model will come into effect at the close of this procurement Pr~~~~~- Fannie Mae is prepared to work with all interested parties to achieve objectives set forth in this RFP. Furthermore, Fannie Mae welcomes creative proposals that further the timely· ~nd successful achievement of ·our goals. · · ·· · · ·

RFP Overview. . . . This RFP Is organizecj into three separateand Independent sets of·requiremen.ts outlined in the following sections:

• · Lender Placed Insurance {Section 4)

• •

Insurance T~acr<ing Services (Section 5)

Voluntary Insurance .Lettering Program. (Sa~tion 6)

Respondents:to this· RFP must bid on either or both· Lender Placed lnsuran·ce (Sectiori 4) and Insurance Tracking · Services (Sectlori-5); they may, if they choose to do so, incrementally bid on the VolUntary Insurance Lettering Program (Section 6}. Pricing for each sectioo must be separate and independent · . . . ·:: RFP Outcome . . . . . . . Lender Placed Insurance (Sec~ion 4): Selected Lender Placed Insurer respondents of this RFP will be put on a Preferred Provider~l!'t tiy Fannie Ma13. The premium levels offered by the selected Lender ~laced·lrisurer(s) o·nthe list will be communlcaied to Fanni'e Mae's Seivicer community. The Servlcer cori'uin.inity will be required to select a Lender Placed Insurer cui .the PreferrM Provider List 'for loim~ they service for Fannie Mae.

Insurance Tracking SeiVices (Section 5): In~L!r~nce. Track~r bids will be communic:ated to Fannie Mae's Servicer community who are entitled to fulfill Tracking Services as they see fit.

Fannie Ma,e Conlid~ntial_ · Page3

. ·. ~ ... .. · .. ·

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Exhibit 23


OPENING STATEMENT- SUPERINTENDENT OF FINANCIAL SERVICES BENJAMIN M. LA WSKY

FORCE PLACED INSURANCE HEARINGS

THURSDAY, MAY 17,2012

• Good morning everyone. Welcome to the first of three days of hearings that the Depmiment of Financial Services is holding on the workings of the force placed insurance industry.

• Thank you to all of our witnesses today who have agreed to come testify at these hearings. We look forward to heming from all of you and engaging in a dialogue with you.

• Thank you also to the team here at DFS that has worked so hard to put these hearings together. Joining me up here to participate in the hearings are Joy Feigenbaum, Executive Deputy Superintendent for the Department's FFCPD, and Daniel Alter, the General Counsel of the Department. They will both be participating in the dialogue we have with witnesses as well.

• Force placed insurance, as most of you probably know, is insurance placed on a home by a lending institution when the homeowner's insurance lapses. It is designed to maintain continuous coverage and protection for properties and does serve an important purpose.

• In recent years, the force placed insurance market has grown immensely. Largely as a result of the downturn in the housing market and the foreclosure crisis, premiums have risen from $1.5 billion in 2004 to $5.5 billion in 2010. The numbers are likely even higher now. With this massive spike in premiums have come enormous profits for the insurers and the banks. At Balboa, for example, profits went from $177 million in 2006 to $1.178 billion in 2010 (on premiums of $1.545 billion).

• This inquiry into the force placed insurance market is incredibly impmiant. It impacts homeowners and investors, and falls, really, at the intersection of banking and insurance. DFS, as you all know, is the product of the merging of the banking and insurance departments into a larger and more robust, overall financial regulator- so force-placed insurance is smack in the middle of our jurisdiction as it spans both the banking, mortgage and insurance industries.

• These hearings are intended to be fact-driven and exploratory. This will not be an inquest or a witch hunt. We want to hear all sides of the issues and delve deeply into the subject in a fair and balanced way.


Red Flags

• With that said, our initial inquiry into the operation of the force placed insurance market has raised a number of serious concerns and red flags.

1. Premiums for force placed insurance seem high and in many cases are exponentially higher than regular homeowners insurance.

2. Loss ratios (or the percent of premiums actually spent to cover claims) seem extraordinarily low. On a typical homeowner's policy, at least 63 cents of every dollar goes to pay claims. But for force placed policies, the loss ratios drop precipitously often below 25 cents and sometimes as little as 17 or 18 cents on the dollar is going to pay claims. The rest is mostly profit.

3. The high premiums can push distressed homeowners over the foreclosure cliff; they also impact investors in mortgage securities. That's because the banks often advance the high premium payments themselves and then pull the funds back out of the property's value once there is a foreclosure or a short sale, etc.

4. There appears to be a severe lack of competition among the few firms that provide force placed insurance. In New York, just two companies, Assurant and QBE, represent more than 90 percent of the market. (So we're seeing high premiums, low loss ratios, and very little if any competition to keep rates down.) And it's no different nationwide.

5. As I mentioned, in the wake of the financial crisis and the bursting of the housing bubble there has been a huge uptick in force placed insurance and it has become a major profit center for both banks and insurers. Force placed premiums increased to $5.5 billion, a more than 265 percent increase between 2004 and 2010.

6. Amidst this boom in premiums and profits, there also appears to be a web of tight relationships between the banks, their subsidiaries and insurers that have the potential to undermine normal market incentives and may contribute to other problematic practices.

o In some cases this takes the form of large commissions being paid by insurers to the banks for what appears to be very little work. In other cases, banks have set up reinsurance subsidiaries who take over the risk from the insurance companies. Thus, the banks pay high premiums for coverage that is highly profitable and then those big profits revert right back to the banks through reinsurance agreements.

o JP Morgan Chase, for example, pays very high premiums to a single insurance company, Assurant. Assurant then turns around and reinsures 75 percent of the risk through JP Morgan's Vermont-based captive insurance subsidiary. JPM is, in effect, paying itself high premiums and making big profits without having to provide much coverage, all seemingly at the expense of homeowners and investors.


• In sum, when you combine this close and intricate web of relationships between the banks and insurance companies on the one hand, with the high premiums, low loss ratios and lack of competition on the other hand, it raises serious issues and questions that we need to explore in these hearings.

Issues Raised

• During these hearings we would like to explore whether these apparent red flags are indeed indicative of a problem, and if so, what conclusions we can draw from them.

• On the surface at least, our initial investigation raises the question of whether the normal insurance market incentives to keep prices down are upside down when it comes to force placed insurance. In other words, the banks purchasing this insurance seem to have little incentive to keep prices down and often, depending on their relationships with the insurers, they may have an incentive to find the most expensive coverage. This perverse incentive, if it exists, would appear to harm both homeowners and investors while emiching the banks and the insurance companies.

• If these inve1ied incentives exist, and we combine that the scant competition in the market, then we may have a situation where ce1iain dominant players have become dominant, not by offering the best prices, but by offering the best deals back to the banks through commissions or reinsurance quota shares or other services and benefits. This again emiches the banks but keeps premiums charged to homeowners who are already in distress very high.

Root Causes

• All of this also raises the question of how did the market get this way. While force placed insurance is, on the one hand, an insurance product, at the same time has clearly become a profit center for the banks.

• Insurance regulators are used to seeing insurance companies competing for customers by keeping prices low. Thus, insurance regulators are usually focused primarily on whether insurance companies are keeping premiums high enough to ensure the future solvency of the companies which protects all policyholders.

• When the insurers last submitted rates to the Insurance Department, they estimated loss ratios of approximately 55 percent. In fact the actual loss ratios turned out to be far lower and usually less than half of what the Department was led to believe they would be. For example, Assurant filed an expected loss ratio of 58.1% to justify its rates. Its actual loss ratios from 2000-2011 was less than 25%.

• This raises the very important question of whether the insurers had an obligation to reassess their prices and business models and resubmit their rates given that


their predicted loss ratios were turning out to bear little resemblance to reality year after year after year.

• As for bank regulators, it appears that until recently force placed insurance was viewed primarily as an insurance product issue best left to the insurance regulators. Bank regulators have thus been largely unfocussed on banks' conduct within this market even as it boomed into a major profit center for the banks.

• The fear then is that over the years the conduct of the force placed insurance market has been operating in the shadows with little regulatory oversight or supervision.

• The Department of Financial Services was created to avoid these types of regulatory blind spots and gaps, and hopefully these hearings will shine a bright light on all of the conduct in this industry. Our hope, again, is to look deeply, carefully, and fairly at this markets to consider what if any fixes and reforms are appropriate.

Potential Reforms

• Some potential reforms are fairly obvious- the affiliated relationships appear to be driving a lot of the inverted incentives and promote little competition. We should consider whether banning these relationships makes sense.

• Separately, we should explore at these hearings whether we should be requiring a minimum loss ratio ("MLR") like we do in the health insurance marketplace. On the health insurance side, we also require insurers who fail to meet their MLR to refund premiums back to consumers to make up the difference. This would obviously be more complicated in a situation with many investors and a foreclosed property but it is worth considering and discussing during the course of these hearings.

So, we are very much looking forward to probing these issues and many others as we proceed through these hearings and hear from all sides of these issues. Thank you.

• Our first panel today will consist of homeowners who have been impacted by force placed insurance. Then we will hear from Robert Hunter, the Director of Insurance from the Consumer Federation of America, and an expert on force placed insurance. Our third panel will consist of several foreclosure prevention advocates. And our fourth panel will be representatives from the two biggest force placed insurers in New York, Assurant and QBE, who together make up more than 90 percent of the market. Tomorrow, we will hear from several of the banks and reinsurers, including JP Morgan Chase, Bank of America, and their affiliates.


• I would now like to turn it over to Joy Feigenbaum to set forth the procedures and rules for the hearings and then we will hear from our first panel.


Exhibit 24


Lender-Placed Insurance

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last updated 6/28/12

A-Z INDEX OF INSURANCE TOPICS

Lender-placed insurance, also known as creditor-placed insurance or force-placed insurance; is an insurance policy placed by a bank or mortgage servicer on a home when the homeowners' own property insurance may have lapsed or where the bank deems the homeowners' insurance insufficient. All mortgages require borrowers to maintain adequate insurance on their property. The requirement in mortgages generally specifies maintenance

Property and Casualty Insurance (C) Committee

MarketRegulaticm: and Consumer Affairs (D)Comniittee

of "hazard insurance." While hazard insurance is a term used in banking circles, insurers 111~urance Regulators Hold Hearing generally refer to homeowners insurance of property insurance. Borrowers can fail to 011 Lender~ Placed Insurance maintain the required coverage for a variety of reasons-cancellation, a withdrawal by their I 06/27112 existing insurer, or even just a simple oversight. However, if a property insurance policy lapses or is canceled and the borrower does not secure a replacement policy, most ' mortgages allow the lender to purchase insurance for the home and "force-place" it. These I standard provisions allow the lender to protect its financial interest in the property (its .. ·.· .. · . collateral) if a calamity occurs. N'(Department ofFinanciai.Services:

I Public Hearing on Force~ Placed

Recent discussion has focused on the rates charged for lender-placed insurance policies Insurance and whether insurers and lenders are making excess profits on this line of business. I Typically, the lender-placed insurance premiums are higher than the property insurance the I borrower could have purchased on their own. A key regulatory concern with the growing I use of lender-placed insurance is "reverse competition," where the lender chooses the coverage provider and amounts, yet the consumer is obligated to pay the cost of coverage. I Reverse competition is a market condition that tends to drive up prices to the consumers, as the lender is not motivated to select the lowest price for coverage since the cost is born by the borrower. Normally competitive forces tend to drive down costs for consumers. However, in this case, the lender is motivated to select coverage from an insurer looking out for the lender's interest rather than the borrower.

In addition, instead of the broad coverage contained in a homeowner's policy, the lenderplaced insurance policy provides for the more limited coverage of a dwelling fire policy. If a

1 borrower does not pay the lender-placed insurance policy premium, the lender may be able to foreclose on the home.

1 There is currently a New York State investigation looking into whether insurers are charging too much and if certain insurance companies are succeeding by what are essentially kickbacks to lenders. On May 17, 2012, there was a public hearing on lender-placed insurance at the New York State Department of Financial Services. After the hearing, New York State's Governor Andrew M. Cuomo and Superintendent of Financial Services Benjamin M. Lawsky announced that lender-placed insurers operating in New York must lower the premiums they charge. "Our hearings suggest a lack of competition, high prices and low loss ratios, all of which hurt homeowners," Lawsky said in the release. I The National Association of Insurance Commissioners (NAIC) will hold a public hearing I Thursday, Aug. 9, 2012, to further discuss the use of lender-placed insurance and the effect

1 of the practice on consumers. The hearing will take place at the NAIC Summer National Meeting in Atlanta. 1

. - - . . . ... . . ..

Director Regulatory Services Division andCIPR •. ·.:·.· ><> Phone; 816~783-8232/

Tiln Mullen Director Market Regulation Phone: 816-783-8260

Media queries should be directed to the NAJC Communications Division at 816-783-8909 or [email protected].

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