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Ellsworth v. U.S. Bank, N.A.

United States District Court, N.D. California, San Francisco Division

March 21, 2014

STEPHEN ELLSWORTH, MARILYN WEAVER, and LAWRENCE and DONENE SKELLEY, individually and as representatives of the classes and on behalf of the general public, Plaintiffs,
v.
U.S. BANK, N.A., and AMERICAN SECURITY INSURANCE COMPANY, Defendants

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For Stephen Ellsworth, Marilyn Weaver, Lawrence Skelley, Donene Skelley, individually and as representatives of the classes and behalf of the general public, Plaintiffs: Matthew C Helland, LEAD ATTORNEY, Nichols Kaster, PLLP, San Francisco, CA; Rebekah Lynn Bailey, LEAD ATTORNEY, E. Michelle Drake, Nichols Kaster PLLP, Minneapolis, MN; Kai Richter, Megan D Yelle, PRO HAC VICE, Nichols Kaster, PLLP, Minneapolis, MN.

For U.S. Bank, N.A., Defendant: James R. McGuire, LEAD ATTORNEY, Morrison & Foerster LLP, San Francisco, CA; Forrest K Tahdooahnippah, Timothy John Droske, PRO HAC VICE, Dorsey and Whitney LLP, Minneapolis, MN; Vernle C Durocher , Jr, Minneapolis, MN.

For American Security Insurance Company, Defendant: Peter S. Hecker, LEAD ATTORNEY, Sheppard Mullin Richter & Hampton LLP, San Francisco, CA; Abigail Johnson Kortz, Brian P. Perryman, Frank G. Burt, Richard D. Euliss, William Glenn Merten, Carlton Fields Jorden Burt P.A., Washington, DC; David Edward Snyder, Sheppard Mullin LLP, San Francisco, CA; Julianna Thomas McCabe, Carlton Fields Jorden Burt, P.A., Miami, FL.

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ORDER DENYING DEFENDANTS' MOTIONS TO DISMISS

LAUREL BEELER, United States Magistrate Judge.

INTRODUCTION

In this putative class action, Plaintiffs challenge their lender U.S. Bank's business practices associated with force-placing flood insurance on their real property that was underwritten by Defendant American Security Insurance Company (" ASIC" ). They also allege that U.S. Bank received kickbacks or other compensation from ASIC. Second Amended Class Action Complaint (" SAC" ), ECF No. 169, ¶ 2.[1] Plaintiffs states six claims in the SAC: (1) breach of contract against U.S. Bank; (2) breach of the covenant of good faith and fair dealing against U.S. Bank; (3)-(4) unjust enrichment against U.S. Bank and ASIC; and (5)-(6) violations of California Business & Professions Code section 17200 et seq. against U.S. Bank and ASIC. See id., ¶ ¶ 86-130.

ASIC and U.S. Bank move to dismiss the SAC, arguing that certain claims are (1) moot, (2) barred by the filed rate doctrine, (3) barred by the express terms of the governing contracts, and (4) fail to state a claim. See ASIC Motion to Dismiss, ECF No. 175; U.S. Bank Motion to Dismiss, ECF No. 174. Ellsworth opposed the motions on February 14, 2014. See Opposition, ECF No. 180. ASIC and U.S. Bank filed replies on February 27, 2014. See ASIC Reply, ECF No. 181; U.S. Bank Reply, ECF No. 182. The court denies the motions to dismiss.

STATEMENT

Plaintiffs and the putative class members have mortgages secured by residential property and were charged for lender-placed (also called " force-placed" ) flood insurance by U.S. Bank. SAC ¶ 1. Lenders generally have the right to force-place flood insurance where the property securing the loan falls in a Special Flood Hazard Area (" SFHA" ) and is not insured by

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the borrower. Id. ¶ 2. Plaintiffs allege that U.S. Bank abused that right by (1) purchasing backdated policies, (2) charging borrowers for expired or partially expired coverage, and (3) arranging for kickbacks, commissions, qualified expense reimbursements, or other compensation for itself and/or its affiliates in connection with force-placed flood insurance coverage. See id. ¶ 2. Plaintiffs further allege that ASIC actively participated in this scheme by issuing backdated lender-placed flood insurance for U.S. Bank and by offering kickbacks, commissions, qualified expense reimbursements, or other compensation to U.S. Bank in return for the business. Id. ¶ 3. Plaintiffs allege that U.S. Bank and ASIC did this in bad faith and knowing that their actions were not authorized by the borrowers' mortgage contracts or the National Flood Insurance Act and were inconsistent with applicable law. Id. ¶ 4.

I. THE PARTIES

A. Defendants

Defendant U.S. Bank is a national banking association headquartered in Cincinnati, Ohio that does business in California and throughout the United States. Id. ¶ 11. U.S. Bank Home Mortgage is one of U.S. Bank's divisions. Id. Defendant ASIC is a Delaware corporation with its principal place of business in Atlanta, Georgia, is a subsidiary of Assurant, Inc., and does business in California and throughout the United States. Id. ¶ 12.

B. Plaintiff Stephen Ellsworth

On or about July 2, 2007, Plaintiff Stephen Ellsworth obtained a $393,892 mortgage loan from U.S. Bank that was secured by the deed of trust on his Napa County, California home.[2] See SAC, ECF No. 169, ¶ ¶ 8, 18, Ex. 1 at 3-4. Ellsworth's mortgage is a standard Fannie Mae/Freddie Mac Uniform Instrument. Id. ¶ 18. U.S. Bank is the lender-in-interest, and it services Ellsworth's loan through its U.S. Bank Home Mortgage division. Id. ¶ 19. Ellsworth's mortgage includes a provision that allows U.S. Bank, in its discretion, to require that Ellsworth maintain flood insurance on the property. Id. ¶ 20, Ex. 1 at 7. The provision states:

5. Property Insurance. Borrower shall keep the improvements now existing or hereafter erected on the Property insured against loss by fire, hazards included within the term " extended coverage," and any other hazards including, but not limited to, earthquakes and floods, for which Lender requires Insurance. This Insurance shall be maintained in the amounts (including deductible levels) and for the periods that Lender requires. What Lender requires pursuant to the preceding sentences can change during the term of the Loan. The insurance carrier providing the insurance shall be chosen by Borrower subject to Lender's right to disapprove Borrower's choice, which right shall not be exercised unreasonably. Lender may require Borrower to pay, in connection with this Loan, either: (a) a one-time charge for flood zone determination, certification and tracking services; or (b) a one-time charge for flood zone determination and certification services and subsequent charges each time remappings or similar charges occur which reasonably might affect such determination or certification.

SAC Ex. 1, ECF No. 169-1 at 7. The same provision permits U.S. Bank to force-place flood insurance at Ellsworth's expense

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if he fails to maintain the required amount of coverage. SAC ¶ 20, Ex. 1 at 7.

If Borrower fails to maintain any of the coverages described above, Lender may obtain insurance coverage, at Lender's option and Borrower's expense. Lender is under no obligation to purchase any particular type or amount of coverage. Therefore, such coverage shall cover Lender, but might or might not protect Borrower, Borrower's equity in the Property, or the contents of the Property, against any risk, hazard or liability and might provide greater or lesser coverage than was previously in effect. Borrower acknowledges that the cost of the insurance coverage so obtained might significantly exceed the cost of insurance that Borrower could have obtained. Any amounts disbursed by Lender under this Section 5 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 and shall be payable, with such interest, upon notice from Lender to Borrower requesting payment.

Id. Ellsworth alleges that U.S. Bank's discretion to force-place insurance is constrained by the mortgage's paragraph 9, which provides:

9. Protection of Lender's Interest in the Property and Rights Under this Security Instrument. If (a) Borrower fails to perform the covenants and agreements contained in this Security Instrument, . . . then 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, including protecting and/or assessing the value of the Property, and securing and/or repairing the Property.

Id. Ex. 1 at 8; see SAC ¶ 20. Ellsworth's mortgage also contains a provision titled " Loan Charges," which provides that U.S. Bank " may charge Borrower fees for services performed in connection with Borrower's default, for the purpose of protecting [U.S. Bank's] interest in the Property and rights under this Security Instrument, including, but not limited to, attorneys' fees, property inspection and valuation fees." Id. at 11.

When Ellsworth entered into the mortgage agreement, U.S. Bank did not require him to carry flood insurance.[3] Id. at 5 n.2. On or about June 9, 2010, U.S. Bank sent Ellsworth a " Notice of Temporary Flood Insurance Placed by Lender Due to Cancellation, Expiration, or Missing Policy Information," stating that " [o]ur records indicate your property is located in a Special Flood Hazard Area (SFHA) as determined by the Federal Emergency Management Agency (FEMA)" and that the Mortgage and the Flood Disaster Protection Act of 1973 required Ellsworth to purchase flood insurance. Id. ¶ 21, Ex. 2, ECF No. 169-2 at 2. The notice explained that U.S. Bank had purchased a 45-day flood insurance binder for Ellsworth's property from ASIC. Id. ¶ 22. The binder was effective as of July 3, 2009, and would expire 45 days after the June 9, 2010 notice. Id. ¶ 22, Ex. 2 at 2-3. If Ellsworth failed to provide adequate proof of flood insurance within 45 days, " this temporary coverage will convert to a full year policy and the annual premium [$2,250] will be added to your escrow account." Id. ¶ 23, Ex. 2 at 3. The notice also informed Ellsworth that " [i]n many instances, the insurance we purchase for you may be more expensive

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than you are able to obtain on your own" and provided the telephone number of another insurance agency that (according to the First Notice) could also provide Ellsworth with adequate flood insurance. Id. ¶ 23, Ex. 2 at 2-3.

On August 18, 2010, U.S. Bank sent Ellsworth a " Notice of Flood Insurance Placed by Lender Due to Cancellation, Expiration, or Missing Policy Information" informing him that it had not received evidence that he had purchased flood coverage. Id. ¶ 24, Ex. 3, ECF No. 169-3 at 2. In the August 18 notice, U.S. Bank stated that it had purchased a " full year flood insurance policy" from ASIC, and the charge for the policy was $2,250. Id. ¶ 24, Ex. 4. The force-placed flood insurance policy was backdated so that it was effective from July 3, 2009 to July 3, 2010 (although it was not issued until August 18, 2010). Id. ¶ ¶ 24-25, Ex. 4., ECF No. 169-4 at 2. There was no damage to the property or claims arising out of the property during that period. Id. ¶ 25. In other words, the coverage was expired on the date it was purchased and was worthless. Id.

U.S. Bank and/or its affiliates received kickbacks from ASIC on lender-placed insurance (in the form of " expense reimbursements" and subsidized insurance tracking services), which is consistent with ASIC's standard business practices. Id. ¶ 26. U.S. Bank did not subtract these kickbacks from the amount it charged Ellsworth. Id. ¶ ¶ 26-27.

In August 2010, Ellsworth purchased a one-year flood insurance policy through State Farm effective September 1, 2010. See id. ¶ 28, Ex. 5, ECF No. 169-5. This policy (like the ASIC policy) provided $250,000 in flood insurance coverage, but it was not backdated and cost only $276. Id.

On April 9, 2012, Ellsworth sent a letter to U.S. Bank stating that the force-placed flood insurance policies violated the deed of trust and requesting a refund of the premiums he paid. See id. ¶ 29; id. Ex. 6, ECF No. 169-6 at 2. Ellsworth did not receive a response from U.S. Bank. Id. ¶ 29. Ellsworth was reimbursed for these charges only after the initiation of this lawsuit, but he has not been reimbursed for his costs and expenses associated with bringing this lawsuit. Id. ¶ 27.

C. Plaintiff Marilyn Weaver

Plaintiff Marilyn Weaver is a California resident. Id. ¶ 9. On or about August 28, 2011, Weaver obtained a $435,000 mortgage loan from First Nations Home Finance secured by a deed of trust on her San Diego, California home. Id. ¶ 30, Ex. 7, ECF No. 169-7 at 2. Weaver's mortgage also is a standard Fannie Mae/Freddie Mac Uniform Instrument. Id. ¶ 30. Ellsworth's and Weaver's mortgages contain identical provisions regarding flood insurance and U.S. Bank's discretion to force place it. Compare id. Ex. 7, ECF No. 169-7 at 4-11 (Weaver's mortgage), with id. Ex. 1, ECF No. 169-1 at 4-13 (Ellsworth's mortgage).

Weaver initially was not required to carry flood insurance on her property. Id. at 7 n.3. On or about November 2, 2011, Weaver received a letter from Freddie Mac stating that her mortgage had been sold to Freddie Mac and that the servicer of the mortgage would now be U.S. Bank. Id. ¶ 32, Ex. 8, ECF No. 169-8 at 2. On or about June 11, 2012, U.S. Bank sent Weaver a notice informing her that " [w]e have been notified of a Physical Map Revision issued by the Federal Emergency Management Agency which places your structure(s) in Special Flood Hazard Area 'Zone A,'" Weaver had " 45 days to purchase flood insurance, and if [she did] not provide adequate proof of flood insurance within 45 days of this letter, as a federally

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regulated lender, U.S. Bank, NA is required to lender place coverage." Id. ¶ 33, Ex. 9, ECF No. 169-9 at 3.

On July 3, 2012, Weaver sold the property, and she finalized the sale papers on July 16, 2012. Id. ¶ 34. On July 18, 2012, Weaver notified U.S. Bank by letter and fax that she would not need flood insurance because the property had been sold and escrow would close on August 31, 2012. Id. ¶ 34, Ex. 10, ECF No. 169-10 at 2-3.

On or about August 13, 2012, Weaver received a response from U.S. Bank, stating that ASIC had issued lender-placed flood insurance for her property with an effective date of July 27, 2012. Id. ¶ 35, Ex. 11, ECF No. 169-11 at 2. Then on or about August 21, 2012, Weaver received a " Notice of Flood Insurance Placed by Lender" that attached the declarations page for the flood insurance coverage on her property. Id. ¶ 36, Ex. 12, ECF No. 169-12 at 2-3. This force-placed flood insurance had an effective date of July 27, 2012, provided coverage of $250,000, and had an annual premium of $2,250. Id. ¶ 36, E x. 12 at 2-3.

Weaver signed the final papers for the sale of her house on August 29, 2012. Id. ¶ 37. She was forced to pay $2,250 in " Escrow Overdraft" for the U.S. Bank-placed flood insurance. Id. ; see id. Ex. 13, ECF No. 169-13 at 2-3. Thereafter, Weaver made several attempts to contact U.S. Bank to ask about canceling the force-placed flood insurance. Id. ¶ 38, Ex. 14, ECF No. 169-14 at 2.

On or about September 11, 2012, U.S. Bank sent Weaver a letter stating that the insurance coverage on her property had been partially cancelled effective August 30, 2012. Id. ¶ 38, Ex. 15, ECF No. 169-15 at 2. On or about September 22, 2012, Weaver received a check in the amount of $2,041 for a partial refund of the $2,250 that she initially paid for the force-placed flood insurance coverage. Id. ¶ 39, Ex. 16, ECF No. 169-16 at 2. Weaver has yet to be fully reimbursed. Id.

D. Plaintiffs Lawrence and Donene Skelley

On or about February 21, 2002, Plaintiffs Lawrence and Donene Skelley obtained a $100,000 mortgage loan from Firstbank that was secured by a deed of trust on their Causey, New Mexico home. Id. ¶ 40, Ex. 17, ECF No. 169-17 at 2. Their mortgage also is a standard Fannie Mae/Freddie Mac Uniform Instrument and contains the same provisions as the Weaver and Ellsworth mortgages. Id. ; compare id. Ex. 17, ECF No. 169-17 at 4-12, and id. Ex. 7, ECF No. 169-7 at 4-11, with id. Ex. 1, ECF No. 169-1 at 4-13.

When they closed on their mortgage loan, the Skelleys' home was not located in an SFHA, and they were not required to carry flood insurance on their property at that time. Id. ¶ 41. On or about September 7, 2011, the Skelleys received an " Assignment of Mortgage" document that stated that their mortgage had been assigned to U.S. Bank effective February 3, 2011. Id. ¶ 42, Ex. 18, ECF No. 169-18 at 2-3. At the time of assignment, the Skelleys were not informed of a flood insurance requirement on their property. Id. ¶ 42.

On December 12, 2011, U.S. Bank sent the Skelleys a form letter claiming that their property was located in an SFHA and that they were required to purchase flood insurance on the property. Id. ¶ 43, Ex. 19, ECF No. 169-19 at 2. The letter further stated that U.S. Bank had placed temporary flood insurance on their property with a backdated effective date of June 1, 2011. Id. ¶ 43. An " Insurance Binder" document was attached to the Skelley Notice that showed that this force-placed

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flood insurance coverage was issued through ASIC, with an effective date of June 1, 2011, a coverage amount of $86,461, and an $778 annual premium. Id. ¶ 43, Ex. 19, ECF No. 169-19 at 3.

On or about February 20, 2012, the Skelleys received a " Notice of Flood Insurance Placed by Lender" that had the declarations page for the force-placed flood insurance coverage attached. Id. ¶ 44. This force-placed coverage had a backdated effective date of June 1, 2011, provided effective coverage of $86,461, and had an annual premium of $778. See id. ¶ 44, Ex. 20, ECF No. 169-20 at 3.

On or about February 21, 2012, the Skelleys' insurance agent, Lori Bohm, sent a letter to U.S. Bank stating that the Skelleys' home was located in Flood Zone D and thus " flood insurance is NOT available nor should it be required." Id. ¶ 45, Ex. 21, ECF No. 169-21 at 2. Attached to Ms. Bohm's letter was a flood zone determination that was completed on February 21, 2012 and stated that the Skelleys' home was not located in a SFHA. Id. ¶ 45, Ex. 21 at 3. The National Flood Insurance Program Map Panel effective date reflected on the form was October 6, 2010. Id. ¶ 45.

On or about March 5, 2012, U.S. Bank sent the Skelleys a letter that stated " A recent review of your account revealed that the property structure secured by the above referenced loan is no longer located in a Special Flood Hazard Area (SFHA)." Id. ¶ 46, Ex. 22, ECF No. 169-22 at 2. The letter also stated that " [a]s a result [of the recent account review], U.S. Bank Home Mortgage no longer requires that you maintain flood insurance. Id. ¶ 46, Ex. 22 at 2. The Skelleys received another letter from U.S. Bank the same day that stated that its records showed " a lapse of insurance coverage from 06/01/11 to 03/0512." Id., Ex. 23, ECF No. 169-23 at 2.

The Skelleys received another letter from U.S. Bank on or about March 12, 2012 that stated the force-placed flood insurance coverage on their property would be cancelled and that they would receive a partial refund of $187. Id. ¶ 47, Ex. 24, ECF No. 169-24 at 2. Nonetheless, because " coverage was provided between the effective date of the coverage [U.S. Bank] obtained and the termination date," $591 would be charged to their escrow account. Id. ¶ 47., Ex. 24 at 2.

Ms. Skelley faxed a letter to U.S. Bank on or about July 5, 2012, reiterating that her home never was located in a flood zone. Id. ¶ 48, Ex. 25, ECF No. 169-25 at 2. Along with this letter, Ms. Skelley faxed a July 5, 2012 flood zone determination that showed that the Skelleys' home was not located in a SFHA. Id. ¶ 48, Ex. 25, ECF No. 169-25 at 3. Like the February 21, 2012 determination, the July 5, 2012 flood zone determination showed a National Flood Insurance Program Map Panel effective date of October 6, 2010. Id. ¶ 48, Ex. 25.

On or about July 16, 2012, the Skelleys received another letter from U.S. Bank repeating its earlier claim that their home was no longer in a flood zone as of March 5, 2012 and stating that " U.S. Bank still required you to have flood insurance for this period of time from 06/01-2011 -03/05/2012." Id. ¶ 49, Ex. 26, ECF No. 169-26 at 2. The $591 charge that U.S. Bank imposed for force-placed flood insurance coverage from June 1, 2011 to March 5, 2012 was added to the Skelleys' escrow account and built into their monthly mortgage payment. Id. ¶ 50. To remain current on their mortgage, the Skelleys have been making increased payments against their will. Id.

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II. THE CHALLENGED CONDUCT

Force-placing insurance is a lucrative business for U.S. Bank and other mortgage lenders and servicers (referred to generically as lenders). Id. ¶ 51. Commonly, the lender selects the insurance provider in accordance with an agreement whereby the insurance provider pays a percentage of the premium back to the lender as an inducement to do business with the insurance provider. Under such arrangements, the force-placed insurance provider pays a commission (also referred to as a " qualified expense reimbursement" ) to the lender or a subsidiary that poses as an agent. Often, the insurance provider also gives discounted or subsidized insurance tracking services to the lender. Id.

U.S. Bank has tried to keep its own compensation arrangement with ASIC secret, but discovery in this action has shown that ASIC paid so-called qualified expense reimbursements (which were not legitimate reimbursements for actual costs and were tantamount to commissions) to a U.S. Bank affiliate in connection with force-placed insurance. Id. ¶ 52. ASIC also provided discounted insurance tracking services to U.S. Bank. Id.

These compensation arrangements (including arrangements involving ASIC and its parent company) are the subject of court opinions, id. ¶ 53 (citing cases), publicly-filed deposition testimony, id. ¶ 54 (quoting a Chase representative who refers to these arrangements as " standard industry-wide practice" ), an article in American Banker magazine, id. ¶ 55 & Ex. 28, and public regulatory filings, id. ¶ 56. For example, ASIC reported to the California Department of Insurance that it paid more than $1.8 million dollars in commissions and brokerage expenses in connection with its flood insurance program in 2010. Id. ¶ 56. According to an article in American Banker, the force-placed insurance business (for flood, hazard, and wind policies) " brings servicers hundreds of millions of dollars each year." Id. ¶ 57, Ex. 30. In return for this compensation, ASIC and its parent company, Assurant, make billions of dollars in premiums. Id. ¶ 58. In 2010 alone, Assurant collected approximately $2.7 billion in premiums through its specialty insurance division, which is primarily is devoted to force-placed insurance. Id. ¶ 58, Ex. 30.

A. Criticism of " Kickback Arrangements" in Force-Placed Insurance

Plaintiffs argue that the " kickback arrangements" between ASIC and its clients (including U.S. Bank) are unjust. Id. ¶ 59. Numerous courts have condemned self-dealing in connection with force-placed insurance. Id. ¶ 60 (collecting cases). Plaintiffs claim that the NFIA allows lenders and servicers only to " charge the borrower for the cost of premiums and fees incurred by the lender or servicer for the loan in purchasing the insurance." Id. ¶ 61 (quoting 42 U.S.C. § 4012a(e)(2)).

On March 6, 2012, Fannie Mae issued a Request for Proposal (" RFP" ) relating to lender-placed insurance. In the RFP, Fannie Mae stated that it had conducted an extensive internal review of the lender-placed insurance process and found that it could be improved through unit price reductions and fee transparency to the benefit of both the taxpayers and homeowners. Id. ¶ 63, Ex. 33. Fannie Mae made the following observations:

o 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[.]"

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o 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.
o [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. ¶ 63 (quoting Ex. 33). Accordingly, Fannie Mae stated that it sought to " [r]estructure the business model" in part to " [e]liminate the ability of Servicers to pass on the cost of commissions/fees to Fannie Mae" and to " [s]eparate the commissions and fees for Insurance Tracking Services from the fees for Lender Placed Insurance to ensure transparency and accountability." Id.

On March 14, 2012, Fannie Mae issued a Servicing Guide Announcement pertaining to lender-paced insurance. Id. ¶ 62, Ex. 31. In it, 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 any lender-placed insurance commission earned on that policy by the servicer or any related entity[.]" Id. ¶ 62 (quoting Ex. 31 at 4) (emphasis in original quotation). The U.S. Department of Housing and Urban Development promulgated similar guidance in its Lender Manual. Id. ¶ 62 n.7, Ex. 32.

Also on March 14, 2012, the California Department of Insurance announced that it had contacted the ten largest lender-placed insurers in California (including ASIC), and asked them to reduce their rates. Id. ¶ 64; see Exs. 34-35. The California Insurance Commissioner expressed concern about " questionable financial integration between mortgage lenders and insurers providing 'forced-placed' mortgage insurance." Id. ¶ 64; see Ex. 34. The Commissioner also noted a " lack of arm's length transactions between lenders and insurers and, in some cases, a financial relationship between the lender and the insurer" that results in higher premiums and prejudices homeowners. Id.

In May 2012, the New York Department of Financial Services (" NYDFS" ) held a three-day hearing regarding the force-placed insurance practices of mortgage lenders, servicers, and insurance companies. Id. ¶ 65 (citing 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," including:

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. ¶ 65 (quoting Ex. 36 at 2). According to Superintendent Lawsky, " [t]his perverse incentive, if it exists, would appear to harm both homeowners and investors while enriching the banks and the insurance companies." Id. ¶ 65 (quoting Ex. 36 at 3). After these hearings, the NYDFS entered into a Consent Order with ASIC. Id. ¶ 65; se ...


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