Notes from this afternoon's DFS hearing into Force Placed Insurance

Monday May 21, 2012 Afternoon Session

Late Start 1:24am

DFS: Next Panel…swear in

Bernie: Working on LPI for 20 years, shining a light is well overdue.

Here’s a summary; LPI market is characterized by reverse competition. 3 entities, and the borrower ultimately pays. The insurer markets to the Servicer, not the borrower. Stringent regulation is required. The DFS Credit Insurance Regulation acknowledges the problem.

LPI expenses aren’t reasonable and shouldn’t be passed on to borrowers. They should only be directly associated with LPI. An overcharge of $500 million since 2004 in New York.

$270,000 per day overcharges continuously.

No evidence for charges in 3 days. Not one servicer or insurer provided any data.

They used excuses and absurb rationales but 0 evidence, and 0 data.

They’re clearly excessive. The DFS should get to work immediately.

The rates should produce 80% or greater loss ratios.

The single most effective action to stop abuses is to require LPI insurers to reduce rate levels to cover expected costs of insurance and filter out excessive profits. It shouldn’t make a profit.

Instead of 5%, they were 8 times more profitable than filing.

In an era of 11-13% being reasonable. American Security was 50%. 4 times greater than reasonable profit.

$1.4 billion = 30% of net premium and $200 more than net after tax income.

Captive Reinsurance received $100’s million and paid very few claims.

What’s causing this? The structure of the market: Reverse competition. Borrowers have no power, but costs are passed to the borrower. Greater competition for servicer business leads to higher LPI prices.

GMAC pays nothing to track insurance on loans. It’s their responsibility. The expenses associated are the responsibility is associated with that loan. Not only does GMAC contract it, but they don’t pay for it. Only the consumers are paying it because the cost of the tracking is built in.

It’s born by the 1-2% of consumers with force placed insurance. It’s hard not to be outraged at the most vulnerable consumers being shouldered with this cost.

The insurance is subsidizing unrelated activities. It’s not the borrower’s place to fund these activities.

FNMA’s bulletin should be taken into consideration. FNMA was going to implement changes. Any servicer request must exclude lender placed insurance commission by the servicer or any related entity. They’re not going to reimburse any cost for insurance tracking. Finally, they said any other cost beyond the actual cost of the premium. They must be competitively priced and commercially reasonable.

There’s certain expenses that shouldn’t be permitted: commissions, admin fees, captive insurance, unrelated transactions.

Tracking – someone has to load insurance info from loan docs to a database for the servicer to track insurance. They have to provide customer service and contact agents. None of these costs are associated with the provision of LPI Insurance. All activities are performed by the LPI vendor. It’s reasonable for them to do that, but unreasonable to charge borrowers for it.

10-15% False Placement rate because of Tracking Errors. Why should LPI borrowers pay for the expenses associated with poor performance of the servicer? (Six Sigma)

Commissions to Affiliated Producers – Servicing providers, reviewing letters, broker commissions, the producer managers the rating program, QC, commissions are a cost of doing business. None of them justify these commissions, let alone the massive commissions being paid. The role is to shop the market. The broker doesn’t engage in quality control of vendors or a company.

These commissions are a kickback to offset the cost associate with servicing. There’s no justification. There’s no Risk Management purpose served. There’s no reason for borrowers to pay these fees.

QBE First the agent gets a significant commission from the QBE company for administering the program. American Security paid over $160 million for “management agreements and service contracts”.

There’s so much self-dealing in the market to provide profit. A reasonable profit load.

The loss ratio should be 85%. They should be refilling their rates including catastrophe.

Homeowners need complex rating models, get individual info, claims history, credit history, etc (all attached to the loan info, which LPI Insurers have access to). None of these expenses are present in LPI. There’s no sales activity that doesn’t result in a policy like on a voluntary policy.

Data and evidence supports what a reasonable rate would be. There’s actual data reported by insurers. It includes actual economic and actuarial analysis. The servicers have simply said we may get a catastrophe.

The data don’t indicate exposure. If LPI Insurers were more concentrated, in years with a cat event, LPI loss ratios would jump more than voluntary, but what you see is LPI loss ratios remained low even when homeowners ratios were high. That suggest LPI isn’t as catastrophe prone as voluntary. Why? The witnesses are incorrect. I would suggest the nature of the coverage. It doesn’t provide personal property or additional living expense.

Another reason to discount is that both insurers right country-wide and diversify their risk geographically. In the event of a cat in NY, it’s unlikely CA or AZ or NV will have one too. That’s what insurance companies do.

REO vs nonREO claims – REO is investor owned. The borrower no longer has an interest. LPI covers both non REO properties and REO properties. It’s reasonable to except more REO claims. REO should be higher than LPI. The info should be broken down by REO & nonREO and borrower rates should only reflect the nonREO claims.

Balboa is waiting for recent rate change to go through. That argument has no merit. They routinely file new rates within a year or 2. Historical premiums are recast. It’s a basic actuarial practice.

Why act quickly? There’s overwhelming evidence of excessive rates, and you have a statutory responsibility to borrowers. They filed false information and knew it. It’s important for you to consider what’s commercially reasonable so it’s not interpreted in a bad way.

Finally the single most effect way for reverse competition in LPI insurance is De-incentivize the market to address these problems. Don’t ask these insurers and servicers to act against their interest, remove the interest. I’m happy to answer any questions.

DFS: One question, a minimum of 80%, what would you suggest if they don’t meet the loss ratio?

Bernie: I don’t have an opinion on refunds or loss ratio rebates for prop casualty insurance. At a minimum is model NEIC models. Review the experience annually. I really believe that’s the department’s responsibility including paid and incurred claims. If you think they’re unreasonably stuffing reserves, look at that too. It’s the department’s responsibility so they should require insurers to come in whenever they’re not meeting the 80 or 85% loss ratios.

DFS: How do provide adequate notice for LPI on the statement, etc?

Bernie: I have views but there are folks who really work on these type of disclosure issues, like the CFPB and their reliance on behavioral economics. We’re pushing for best practices on consumer disclosures. Marketplace testing needs to take place to ensure the consumer is being empowered instead of a servicer liability shield.

DFS: Mr. Berbaum, you said one of the reasons it should have a lower cost is because it’s a group policy with no individual inspections. Insurers say that fact is the among the reasons there are high costs. They take on the homeowners without individual inspections.

Bernie: It’s logical to expect properties not underwritten would have higher cost, all other things being equal. The coverage afforded on the LPI policy is less so while there might be a greater frequency of claims under LPI, the severity may be significantly less.

I wanted to get back to rebates. What I am certain is insurance companies shouldn’t have been permitted to overcharge consumers based on false information given to the dept or based on kickbacks or inappropriate, and possibly illegal fees. To the extent you find that’s the case, I think it’s personally reasonable to rebate excessive amounts.

DFS: What are your suggestions for more LPI competition?

Bernie: The problem isn’t just in LPI. It’s in PMI, Title Insurance, etc. It’s the structure of the market. There’s no direct to consumer. In order to get the lender’s business, the lender has the market power and they command consideration.

One possibility is to require the lender/servicer pay for insurance and not be permitted to charge the borrower as a separate charge. That’s feasible for title insurance but not for LPI because the LPI insurance premiums are for 1-2% of the portfolio. Making the lender pay and not permitting a separate charge to the borrower, the lender has all the incentive for lower premium and has power to demand that lower premium.

Ensure rates are reasonable or nonexcessive (actually for the first time, I disagree. Charging those 1-2% a servicing fee for the service of shopping insurance is perfectly acceptable and incentivizes the servicer to price shop. The markets are big enough that voluntary insurers can participate).

DFS: limiting retroactive billing

Bernie: One of the really good things about LPI is that it’s automatic coverage. I don’t want my testimony today to be seen as a criticism of the product. It’s an essential product of the market (it’s a service).

It protects borrowers, investors, lenders. The question is how long should it take to discover if there’s a lapse in coverage? In one situation in Florida, a borrower refinanced the loan and the servicer said ok you have insurance at the time of closing. The borrower got the refinance. Then a month later, the borrower got a notice that there was a problem with the insurance. The borrower didn’t hear anything again until over 6 months later when they heard from the servicer that you haven’t had insurance (actually the loan tracker), it was an $18k annual premium. The borrower was outraged and didn’t know there wasn’t coverage. The borrower got a voluntary policy, but by that time, there had already been $10k premium incurred before the borrower even knew to go out and get the coverage.

I’m oversimplifying, but the point I want to make is that it’s certainly reasonable for the servicer to charge for retroactive premium, but only with notice to the borrower to the borrower has the opportunity to purchase voluntary coverage.

DFS: The borrowers say they don’t see it until they get a lawyer, but the servicers say they tell them 8-15 times. What’s the disconnect?

Bernie: One possible explanation is when servicers monitor the performance of LPI vendors, a lot of that is probably done through reports for standards. It’s probably data driven, false placement and call answering rates, whatever. The servicer might see 99% done well. Well that leaves 1%, and if you have a portfolio of 10 million people, 1% is 100k customers. That’s a lot. They may not be strong enough.

Another explanation might be that the servicers aren’t really doing a great job in monitoring the performance of the vendors and relying on the vendors to self audit instead of really auditing.

DFS: (whispering) In your 80-85% minimum Loss Ratio, how does it encompass cat?

Bernie: It would include all claim related costs. That provision for catastrophe claims might be a reinsurance in lieu of the cats or a cat model. For example, you had 80-85% and out of that 20% is for cat claims. What you would expect is 65% loss ratios on non cat claims and then 100%. But you wouldn’t expect a rate increase after because it’s included in the rate.

That’s important. Your work is important. Not only are we talking about 10’s of thousands of NY consumers, but you’re on the forefront across the country. The work you do will have a profound influence on regulators across the country. It will create a precedent and imperative, but no pressure.

 DFS: ok, well we thank you very much for your testimony. We’re going to take a 5 minute break and then have our next panel.

Notes from GMAC and AHMSI Hearings

Day 3

Monday May 21, 2012

Late Start 7:20am

Intro by Joy

DFS - Chris Malbeko Sr Counsel, Nancy Ruskin Deputy Director of Consumer Fraud

GMAC/Ally/Rescap, American Home Mortgage Servicing Inc

Bernie Burnbaum Legal Aid Society & Consumer Advocates

Steven Masy, EVP & Michael Scolanti, GMAC Swear In

AHMSI – Questions raised in public hearing. Responsibility is to insure adequately against loss

Majority choose own insurance. Sometimes borrower forgets premium or chooses not to do so or changes insurers and forgets to advice AHMSI (blame the borrower, what about escrow????)

Borrower fails, but no charge as long as Dec page is shared.

Our goal is to make our placement of insurance the last resort for insuring the property. For example, if payment on an escrow loan are insufficient for voluntary and policy has not cancelled, we will advance from our own funds (actually from escrow…borrower funds…not yours) to avoid expensive policy.

We take many steps for 60 days notice before being charged. The goal is to engage borrowers and remind them of their obligation and encourage contact to avoid coverage. If borrower provides uninterrupted coverage, AHMSI will not charge any premium. If placed, but the borrower or insurer at any time provides that evidence with no interruption, we provide full refund.

AHMSI entered voluntary agreement with DFS to be a leader in the mortgage servicing agreement.

GMAC – SVP in charge of customer operations which includes loss mitigation, HAMP, etc.

Homeowners face challenges because of us, us, and the economy. We have pride and commitment through loan mods to avoid foreclosure for our best interest. LPI is a last resort. We communicate effectively. For escrow, if we don’t receive a renewal 15 days prior to expiration, we call insurance carrier/agent for premium (not to pay). GMAC seeks info regarding insurance coverage before placing lender placed policy (they have access to prior insurance info, so not blindly insuring as previously stated by BAC & Chase).

We process refunds within 14 business days. We strongly prefer borrowers don’t fail, but we advance our own funds (borrower escrow funds). We don’t receive payments in any form for LPI and recoup costs to keep borrowers current. GMAC has no involvement in rates, no reinsurance and no financial interest or affiliation. We rely on QBE First.

GMAC continuously reviews for fairness for investors and borrowers. We remain open to better serve NY consumers.

DFS: One thing we’ve been talking about are the various incentives or considerations that the insurers provide to the servicers in connection to LPI. I’d like to start with that. Did AHMSI ever receive a lump sum payment or bonus from QBE predecessor ZC Sterling?

AHMSI: Yes

DFS: Was that in excess of $9 million?

AHMSI: Yes

DFS: What was the point of that payment?

AHMSI: It was in Aug 2008, so I’m aware it exists but I don’t know why it is that amount. I understand at its face it’s for additional up front compensation for references and sit on advisory boards (but not for premiums). I tell them where they excel. I’ve sat with the president and discussed their industry (but not rates or premiums).

DFS: The letter that you reference refers to marketing efforts? Explain

AHMSI: I don’t know intent or interpretation except what I said…to assist them in developing their program. They wanted to expand. Having us as a client would help them, whether with language of letters, website, etc. I’ve been a part of it all.

DFS: Do you think homeowners or investors should be required to absorb these marketing costs in premiums?

AHMSI: Ummm…I don’t…I don’t know that they absorb that. They pay a premium that gets assessed to the borrower. No one is requiring the borrower to place LPI premiums. They have the option to maintain their own coverage and it’s our preference they do.

DFS: My point is the filing and expenses, do you think that servicer marketing for a force placed insurer to promote their product is an appropriate expense should be included in the rate?

AHMSI: I don’t know. I don’t develop rates (but you sit on their board with their president). We rely on QBE. QBE QBE QBE

DFS: Does AHSMI receive commissions from QBE First?

AHMSI: We do

DFS: How much?

AHMSI: A relatively standard 15% of net written premiums. Refunds of LPI are deducted from any premiums written and no commission can be earned on a cancelled premium. Borrower’s fault, even if we assess premium

DFS: Since when have they received 15%

AHMSI: Since the inception of the agreement, July 2008.

DFS: How much are you paid monthly in commissions?

AHMSI: That depends. It’s on Net Written Premium. It’s on the borrower. A Million to 2 million I suppose.

DFS: do you know how much you’ve received since 2008 total?

AHMSI: I do not know.

DFS: What was provided to us was more than $60 million. Do you dispute?

AHMSI: I don’t know

DFS: Doesn’t AHMSI have a servicing agreement with QBE First under which QBE provided outsourced services?

AHMSI: Uh, Tracking Services. The agreement is for tracking insurance, not for placement per se.

DFS: So QBE First is responsible for tracking when borrowers have coverage? Aren’t they responsible for letters to customers as well?

AHMSI: Yes that’s correct

DFS: Aren’t they also responsible for issuing LPI?

AHMSI: Yes

DFS: Isn’t QBE First responsible for responding for borrower inquiries?

AHMSI: Yes

DFS: Do they manage Escrow Services?

AHMSI: Yes (Chase & BAC said no)

DFS: So because QBE First has all power, doesn’t AHMSI provide minimal service for our commissions?

Can you describe AHMSI services performed?

DFS: So let’s talk about I guess business in general. AHMSI has a duty to ensure coverage, but we’re not an insurance company, we service mortgages. We hired QBE First for that. They have technologies we don’t have (based on Windows 98) or afford. They can receive a voluntary policy and scan those documents in and their OCR tech can determine the policy and recognize the policy. We don’t have that (Windows 98) technology. We don’t do our own printing either. It’s not unusual for these relationships.

Specific to your question to what we do: a lot. Today we service 400k + loans. If I spread those out linearly, that means 33k loans are apt to have their insurance expire in any particular month. The end result is placement of LPI. In the administration of mortgage servicing, there are literally perpetual transactions every day. Uh, in that course, for example, for an ARM change, his payment inadvertently gets processed using pre-ARM adjustment (AHMSI error). We reverse and reapply.

Blah blah blah…we made a mistake, QBE First has to react, the borrower did nothing….and that happens a lot.

Additionally you took exception, but we audit QBE First (how? You don’t know insurance) We developed everything (you just said you didn’t) and make sure they administrate the loans in according to our instructions. So insurance agents (which I said we don’t have) check for evidence. We look at cancelled LPI to make sure borrower was cancelled correctly. We do a lot of auditing day by day (but you’re not an insurance agency by your own admission…how are you qualified to audit work you don’t even have the technology to perform?)

If your escrow is short because you’re late with your bill. AHMSI advances those dollars (actually QBE advances it…out of the borrower’s escrow). We borrow the money (from the borrower) to pay millions and millions and millions in interest supporting failed borrowers. That’s what our commission is for.

DFS: You reference the audit function. Do you think auditing your vendor for LPI is appropriate and should be passed on to the homeowners?

AHMSI: I don’t know if it’s included in the rate, that’s the insurance company.

DFS: You’re receiving a commission.

AHMSI: All of our borrowers to make sure we do a good job, I know as a consumer I do. If I know I have a relationship, I would hope they would spend money on compliance so yeah, that’s fine.

DFS: The issue is that the cost for LPI far exceeds the cost of voluntary insurance so when commissions and other payments are added to the cost, ultimately those premiums may not be appropriate when the homeowner receives less coverage than before.

AHMSI: (stunned silence) I’m sorry is that a question? But Umm…..yes I think there are a couple of facts I’ll repeat: Borrowers can avoid LPI. It’s in their control (not based on what you said a few minutes ago). Also the insurers need to set correct rates.

DFS: Do you know your LPI loss ratios for your portfolio?

AHMSI: No

DFS: Do you know QBE’s Loss Ratios across the board?

AHMSI: No

DFS: We heard under 30% for 3 years. Doesn’t that indicate high premiums?

AHMSI: (silence) I don’t, I don’t know that it does. I’m not in the insurance business (but you personally audit them). I’ll conject that maybe QBE also purchase stop loss coverage to help administrate risk and pays for reinsurance for catastrophe. I don’t know if 26-30% is fair and equitable considering all other factors or not. As a citizen, I guess, I would question how many years of a 30% loss ratio it takes to offset a Katrina year. I don’t know. I’m sorry. I’m opinionating. I think the right response is the dept and industry has a mechanics in place to review loss ratios and set rates. Each year, your carriers are required to submit to you 100’s of pages of stats about loss ratios, casualty, etc. I would think the dept would sum total all of that info they receive annually from the carriers would have all the info necessary to determine premium viability.

As a businessman with a duty and obligation to both our borrower and investor, I want to look to the state and the industry (we’ll do what we’re required to do).

DFS: One reason for hearings is expenses, commissions, etc in rates weren’t transparent. We’re exploring these rates. One point I’d like to make since you spend some time saying your obligation is to investors to the extent the homeowner can’t pay, ultimately it’s the investor that bears the cost. I’d ask whether you, as AHMSI, would better serve your obligations to investors/homeowners by asking QBE for lower rates.

AHMSI: That’s a complicated request. I don’t know that it’s our position to step in front. I’ll leave that to you, but relative to the borrower/investor, the intent is in tune. Borrowers want to replace a burned down house. Just relative to the investor alone, I think they’re looking for viable loss mitigation. They’re aware there’s a cost, but they look at us to collect payments due and assist borrowers actively to ensure they stay in their houses. I think we lead the industry in taking care of borrowers. I do think again if the borrower is delinquent and working to bring themselves current, if their carrier (not borrower) delivers to me a bill, AHMSI dips into our (borrrower’s escrow) pocket and pays it.

LPI is arduous to keep tabs and process, checking, auditing, funding, it’s expensive. I don’t like LPI, but it’s our obligation, and borrower’s actions or lack of forces us to have to take action.

DFS: The dept doesn’t dispute LPI is appropriate in certain circumstances (service, not product, they’re procuring insurance for you). What about previous homeowner testimony?

AHMSI: FEMA changed determination of her property to required flood coverage. We notified her and she contested her flood plain with an elevation certificate. We explained if it was certified and approved by FEMA to opt out, we honor those. There’s a process (like he said, a long, arduous one) when FEMA changes designation. Ultimately she chose not to, and got her voluntary carrier to issue coverage with a gap for a small amount, unacceptable.

We advised her it was too low, and ultimately several months later, her Gap policy was cancelled (a Gap policy isn’t for a time gap. A flood gap policy is for the gap between what you acquired and the $250k max).

DFS: When you talk about auditing, do you look into branding problems?

AHMSI: I’m not familiar with that. I’ve hired QBE First to perform insurance tracking and respond to customers. Umm…I expect QBE First to be AHMSI. They have our Policies and Procedures (also Bank of America, GMAC, etc). I have an expectation that QBE is AHMSI when they communicate to our customers. I would venture to say my services rep with QBE First would probably be able to recite to you my mantra to them. Blah blah blah.

They know my expectation, AHMSI’s expectation. It shouldn’t be confusing. If they said QBE First, the borrower may be confused. If the borrower asks, I would expect them to provide the truth (nope…that’s not in the P&P’s you provided). I don’t know specifics. She can call in and talk with AHMSI’s customer care or call QBE First from the letter who is AHMSI in those endeavors. She can talk to either or both. We share a servicing system (BAC said there’s no shared systems).

DFS: I think you said about commissions that one of the roles you fill is auditing QBE First. Their interactions with customers, phone calls, and

AHMSI: We calibrate phone calls and make site visits to QBE, both for tax tracking, escrow administration, and Loss Drafts Administration (claims).

DFS: Customers get the runaround, being referred back and forth between QBE First and AHMSI with no connect between info given. Can you explain how you make sure QBE First has that info since you are required to provide a SPOC?

AHMSI: (closes eyes to think) we’re human beings administrating services and tracking. I’m sure mistakes do get made. When they’re made, I apologize to any of our borrowers. That’s not our intent. Our intent is excellent service, as I’ve said. We want to be a leader and serve our customers and borrowers.

If human beings being involved and can’t quickly use systems (they can all access the same systems, you bullshitter). There is a servicing system with an escrow workstation. All info is in AHMSI’s system. QBE First info is boarded into system. The info is there for the borrower to be serviced. The borrower gets a letter, and QBE First has access to our Servicing System (not what BAC said).

SPOC was designed to help servicing distressed borrowers, not related to insurance. We try to centralize the SPOC service as broadly as we can. It’s naïve to except 1 individual to know loss mitigation, bankruptcy, tax implications, insurance implications, escrow administration, there’s an awful lot of info. There’s only so much 1 individual can do, so we break it into components.

DFS: Question about the servicing agreement. It requires AHMSI to take steps to continue or reestablish voluntary. Since entering the agreement have you changed your practices?

AHMSI: Specifically I don’t know. Again, I can tell you that it is AHMSI’s intention to attempt to keep coverage in place whenever we’re allowed. I gave an example where a borrower cancels their coverage. AHMSI can’t negotiate that policy, the borrower cancelled it. AHMSI is dependent on the borrower. The Geico lizard or Allstate or Flo. (more bullshit). Every night our borrowers are being pounded on by the insurance industry saying “come to us. Come to us.” I don’t mean to sound glib, but they may change. AHMSI is reliant on the borrower if they change. Long winded answer, we make every attempt possible.

DFS: Who would know?

AHMSI: I don’t know who would be able to respond. I don’t know that

DFS: Is there someone at AHMSI in charge of the agreement?

AHMSI: Me. Umm…our compliance and legal are perpetually reviewing how to serve our customers. Can anyone say we read our own agreement? Change is perpetual, etc. We probably have changed it, but I don’t know that anyone’s sat down and reviewed the agreement.

DFS: How many employees to you have for LPI?

AHMSI: 5 of the 6.

DFS: Does that include IT?

AHMSI: IT, Human Resources, Accounting, etc are administrated by AHMSI as a whole. In our customer care group, they calibrate calls and audit conversations…ummm..ummm…when we do our site visits, it’s a different element of an audit (more bullshit. I used to give those site visit tours through operations. They see nothing and get some great food out of it).

There’s more AHMI that has nothing to do with me audits (once again, not what BAC says). Multiple auditing tiers to meet our obligations as a servicer.

DFS: How many people go?

AHMSI: It depends from a couple to a lot.  It depends. Always a couple. A pair. 2. (who go in groups with other vendors, such as GMAC, Chase, etc, so there’s usually a dozen total in each tour.)

DFS: You reference that ZC. Sterling issued warrants to AHMSI shareholders. Comment?

AHMSI: Comment? (awkwardness)

DFS: Did that play a role in selecting ZC Sterling?

AHMSI: I have no idea. That was between ZC Sterling and a completely different entity. I don’t know.

DFS: Did Assurant offer any warrants?

AHMSI: I have absolutely no idea. I don’t know. I can ask.

DFS: I’d like to know whether the 2008. Is it fair to say financial terms were a prime consideration in considering QBE First?

AHMSI: Again, I’ll take exception to prime because I don’t know what it means and I don’t know if it was comparable to any other arrangement, then not if it’s equal. Yeah yeah yeah, but I I I I I I do know, I was aware of ZC Sterling. One of the considerations was the reputation through osmis (really?) probably a significant consideration. Being organic (in money laundering) and dialogue (or money laundering) and listening to me, and I apologize. I can shag a dog. They listen to my concerns. We get great response. It’s comprehensive and organic.

With a snag for claims administration, we get on the phone and almost always QBE will defer to us, and if we want this claim paid, here’s what I understand and you don’t make sense, they’re flexible with us (the servicers) in the placement of the product (performance of service).

DFS: do you know what percentage of claims submitted are paid?

AHMSI: No, I will try to get it.

DFS: You said AHMSI oversees filing of nonborrower claims. What type of oversight is done on vacant properties?

AHMSI: I don’t know (QBE FIRST DOES THAT). There’s a process in the servicing arena that isn’t our responsibility. We receive inspection reports and BPO’s through different business units (of QBE First) then outsource the claims administration to 2 vendors not QBE. This company pursues claims on behalf of AHMSI (to QBE…these bankster idiots are reading my notes…fucking cheaters…).

DFS: who?

AHMSI: Dimont out of Atlanta and Quality Claims out of San Diego

DFS: What about duplicate coverage? Approximately 60% may have duplicate coverage and refunds are automatic (no they’re not…QBE First’s Premium Administration and Data Integrity departments do this, under Steve Ramsthel, DaleAnn States, Rhonda Meyers, Peggy Johnson, etc from the Anonymous leak last March)

AHMSI: The minority of our borrowers. The vast vast majority fulfill their obligations. We reach out 15 days prior to and attempt to discuss renewal with their agent or insurance company to make sure there’s no duplicate coverage (QBE does all of this…not AHMSI).

I would like to turn our self-insurance woes onto the Insurance companies and drag them under the bus with us. (QBE’s website was IHaveInsurance.com…when did it become updatemyinsurance.com????)
It’s not intended to be complicated, blah blah blah. If they call us to discuss insurance, they’re transferred to QBE First. Sometimes it’s the wrong info or to the wrong fax number (all done by QBE First, not you).

I think the borrowers if they fail to respond and get to letter cycle, I think they say oops and send the Dec page, it gets scanned by QBE First, coverage goes away, everything’s good (Wrong again, kid).

DFS: there’s a real disconnect between the homeowners, advocates, and legal counsel and the servicers. We’re not suggesting anyone’s not being truthful, but we need to look at the processes.

AHSMI: From my perspective, having an active conversation. I’ll try to add it to things, from the fax number to attaching a step by step list, etc (all borrower’s fault). We’re always open.

DFS: Let’s talk about the letters.

AHSMI: They go out under separate cover. My personal concern with nesting is they may think it’s additional info they don’t need (as opposed to a blank envelope?!?!?!? You’ve gotta be kidding me by now).

We, again, our goal is to be direct and forthright so the borrower, the borrower, the borrower. Between our brethren in mortgage servicing. If we think putting it on hot pink paper is better, we’ll do that (yeah, asshole…bright pink paper and car wash coupons will help.)

DFS: single/dual interest

AHMSI: Dual interest. The borrower is issued a certificate. That certificate is dual interest (until REO).

DFS: What is done to explain to the borrower when they see the servicer as a policyholder. What do you do to tell them they can file a claim?

AHMSI: I don’t….I would question whether borrowers are thinking it’s insurance. It’s insurance. Borrowers would think that’s their insurance policy. If they’re confused, they can contact us (no they can’t) they can hit insurance and go to QBE First. They can talk to my group (of 8...servicing 33k per month transactions).

DFS: there’s confusion with low Loss Ratios compared to traditional insurance at 65%. We’re trying to get to the bottom of that.

When you’re seeking proof of voluntary coverage, do you allow payment options like the force placed insurance?

AHMSI: If they’re escrowed, we pay monthly and disburse annually from their account (but earlier you said that was out of your pocket).

Non escrow there needs to be an annual policy written. How a borrower facilitates payment (AHMSI sets up an escrow account for LPI) AHMSI doesn’t know that. That’s QBE (who we audit).

I don’t know that we have any policy for anything. Umm…I think the concern about monthly pay is that the insurance company themselves can be automated. The borrower’s check doesn’t get there until 3 days after the month, I’m likely to get a cancellation notice from that carrier due to non payment.

If they receive repeated notice, I would think it would be a very disciplined borrower unless they set themselves up on ACH. That’s the carriers.

DFS: GMAC, we’ve been ignoring you. Who is Homecomings?

GMAC: Homecomings Financial was another GM owned mortgage company. I’m GMAC mortgage, and that was a servicer for another company owned by GM. We had no responsibility with them until 2007.

DFS: Are you aware with Assurant and Homecomings 2004 agreement for being sole force placed insurer? When did you convert?

GMAC: May 1, 2007

DFS: That was still during Assurant’s agreement. Why was a switch made?

GMAC: QBE was operationally stronger, so we consolidated. It was a better operation. It was double the work.

DFS: I believe there was a year left.

GMAC: I wanna say it was a year. We had to provide notice prior to that of cancellation. We did not pay any penalty.

DFS: In 2007, when Homecomings switched to Balboa…can you tell us who Newport is?

GMAC: It’s the tracking arm of Balboa. I’m not versed. Balboa for all intensive purposes.

DFS: $4.2 million in conversion costs for Homecomings. Do you know how much was actually paid to GMAC?

GMAC: I will get that. We’ve been trying to find out.

DFS: what for?

GMAC: Unrelated to Force Placed Insurance. Technology changes. Scripting changes, QC, Loss Draft Processes, Insurance Claims, Increased Customer Phone calls, REO insurance monthly process (only for hazard REO. Flood REO is still annual).

That was based on Balboa’s tracking services.

DFS: Did Homecomings pay Assurant?

GMAC: I don’t know. I didn’t manage it.

DFS: I can tell you that homeowners paid Assurant on a per loan basis. Does GMAC currently pay QBE First for tracking services?

GMAC: No we do not. We do not share in the expenses or revenue. We wholly outsource to QBE. You would have to ask QBE. I don’t have their financial info.

DFS: are you aware other servicers pay for tracking services? Would you view this where GMAC does not have insurance agency taking commissions, in lieu the consideration that might be given is not having to pay for tracking services?

GMAC: same bullshit answer as before. It’s speculation. I don’t understand.

DFS: The servicers pay the insurance tracker. Why don’t you pay?

GMAC: same exact bullshit answer.

DFS: QBE is tracking for free?

GMAC: You’d have to ask them.

DFS: How do you analyze QBE?

GMAC: System transparency and reporting, onsite audits through business analysts.

I have a peer for call centers. He does it all (meaning I don’t know).

(it’s getting really good right now) J

RFP was late 2001/2002.

I can’t answer if premiums were considered.

DFS: Did Balboa not requiring tracking fees?

GMAC: in 2003, they did charge

DFS: Do you know how much?

GMAC: I can try

DFS: We asked about erroneous placing of force placed insurance. GMAC stated it reviews the performance on a monthly basis to review for compliance. We notify of concerns of QBE’s performance. What kinds of problems has GMAC found?

GMAC: QBE has performed well aside from clerical errors.

DFS: Do you have an error rate?

GMAC: We do not (you said you audit them)

DFS: you refunded more than retained.

GMAC: I don’t pay attention to that. I’d refer to QBE for that. My staff typically (during audits) at premium.

DFS: (whispering) do you want to just put it in the record?

Do you receive the quarterly and annual business reviews provided by Balboa? Did you review those?

GMAC: Not in 2010 (why did you bring up 2010, nervous nelly?)

DFS: Was there ever a discussion of Loss Ratios?

GMAC: Informational. I’m not familiar. We’re not involved in premiums. They’re template reports (just like I said in the FNMA regulations).

(These fuckers are going to jail…I absolutely LOVE you, Joy!)

I’m familiar with the numbers.

DFS: You know the numbers, the loss ratios were generally very low in the 20% range?

GMAC: yes, but I don’t know if that’s low or high. I don’t know insurance.

DFS: does anyone evaluate loss ratios?

GMAC: as stated earlier, we rely on the regulators (take these people down…regulate the fuck out of them).

DFS: Do you feel you have an obligation to the customers (borrowers) to price shop LPI?

GMAC: QBE QBE QBE QBE QBE QBE QBE QBE

DFS: so it’s in GMAC’s interest to maybe use it’s market power to try to encourage lower LPI rates.

GMAC: We would benefit, but I don’t know we have that power. We would refer to QBE. We would be in favor of lower rates.

DFS: Where does GMAC fall in terms of ranks in terms of servicing loans in the US?

GMAC: GSE’s top 3. We’ve ranked in the HAMP and Loss Mitigation for top 3 and generally number 1 since the program is in effect. We’re highly regarded.

DFS: size?

GMAC: 5^th

DFS: that implies market power.

GMAC: We rely on state regulation.

(more stumbling…this guy reminds me of Jerry Lewis. He looks like he’s wearing those glasses with eyeballs drawn on them)

DFS: How does LPI high rate help customer?

GMAC: It doesn’t. We rely on investor and state regulations. I’m not an attorney. Talk to my attorney.

DFS: Are you familiar with homeowner letters?

GMAC: I have read them, but I’m not familiar with the envelopes.

DFS: QBE First does this under GMAC’s name?

GMAC: I believe so. They’re not included with the mortgage statement.

DFS: Do you know whether the envelope has anything ?

GMAC: I’ve never seen it, but I assume it says important info enclosed (sorry, I’m falling behind by laughing so much at this guy).

DFS: Does GMAC or QBE or a vendor on GMAC’s behalf inspect vacant properties for LPI?

GMAC: We do have tracking, but I don’t know if they’re filing claims, but I can provide you with claims on vacant properties (actually QBE will do that…through FIS system queries…what I used to do).

I assume, I assume. I’m not sure.

DFS: you manage operations?

GMAC: for problems, I do.

DFS: Have you ever heard or been part of discussion within the company about the impact of high premiums impacting customers?

GMAC: No, we rely on QBE and it’s regulators (hahaha, not it’s QBE’s regulators…smooth, son)

We like Balboa.

DFS: Minimum Loss Ratio?

GMAC: I’m not an insurance financial expert. We would support whatever you legislate.

AHMSI: That’s complicated. I think I’ve said we look to regulators.

When it comes to it, we’re mortgage servicers. We carved our reputation on keeping borrowers in their homes. Anything we can do we will.

DFS: The numbers are profitable. The loss ratios are extremely low and the profits are there. Thank you. I know it’s not easy, but we really appreciate your time.

*Lunch Break*

Key Talking Points from NY Department of Financial Services Investigations

Force Placed Insurance
Definition


When you have a mortgage or auto loan, you have a contractual requirement to carry certain insurance coverages. If you do not have the required insurance, the bank will purchase it on your behalf.

4 Types of Force-Placed Insurance:
Home (Flood)
Home (All Other Perils)
REO
Auto

2 Loan Types:
Escrow
Non-Escrow

Non Escrow Issue

Voluntary Insurance is $1000 for a $200k home. If your policy lapses or is determined insufficient, the bank forces coverage at $4000.

Conflict of Interest = Why not pay the $1000? Why are you paying the $4000?

The Banking Industry's answer is that it's because you're a higher risk factor because they haven't seen the house. The real answer is because when you pay $4000, the bank and insurance company each get to pocket $1600.

There is a kickback involved, but this is the financial sector. It's not easy to see unless you know the magician's tricks. The Loan Servicer has an obligation to the Investor to keep the servicing cost per loan as low as possible. They accomplish this by contracting the work to an Insurance Tracker.

The Insurance Tracker can keep servicing costs low because the bulk of their profit comes from Force Placed premiums.

Escrow Issue

You have a contractual agreement to add an escrow payment to your mortgage. For a $1200 annual policy, $100/month of your mortgage goes to an account for your Loan Servicer to pay your next year's insurance premium. The Loan Servicer doesn't do this work. They hire an Insurance Tracker to process all insurance transactions.

An Insurance Tracker (by definition of their business model) makes money for their stakeholders by Tracking Insurance. QBE (aka Balboa when it was owned by Bank of America until last summer) and Assurant act as the Insurance Tracker

QBE/Assurant also act as the Force Placed Insurer.

The Loan Servicer is now paying QBE/Assurant to decide whether or not you need QBE/Assurant's high priced policy

Claims Issue

In a claims situation, the Insurance Tracker acts as the Loan Servicer. They must serve the interest of the Loan Servicer, which is against the Insurance Company.

But remember…The Force Placed Insurer IS the Insurance Tracker. They are also the Insurance Company, and as such must serve the interest of their stakeholders and reduce claims payouts.

Lender Proccessor Services from the Robosigning scandal also maintains Insurance Tracking systems for most lenders LPS systems were originally FIS systems and are still maintained by Fidelity Information Systems.

Paraphrasing Bank of America's Testimony to the NY Department of Financial Services

Friday 5/18 Hearings Part 2:

1 hour recess given

Late Start 1:34

DFS: Welcome back to Afternoon day 2

Swear in

Bank of America: Steve Smith National Association for LPI err Mortgage Servicing as stated in Written testimony I’m SVP since Nov 2010.

Everyone needs hazard and other coverage. The servicer may obtain if necessary

On June 2011, sold to QBE, which provides LPI Services.

Procedures are written. Bank of America practice performed by QBE First.

Typically 60 days from expiration.

For escrow, they contact the insurer directly.

Even after obtained they can provide proof (not to BAC, but to QBE/Balboa).

LPI is necessary risk mitigation facilitating liquidity (like foreclosures?)

Only 5% of our portfolio ultimately has LPI

DFS – Your competitor Chase chose not to cooperate. BofA by being willing to send you is putting your money where your mouth is in doing the right thing.

Bank of America Insurance Corporated: Tim Berdick Bank of America Insurance Agency

I am currently an executive. I serve as an officer of BASI, which I’m president since 2011. I did not become personally involved with LPI until mid 2011. Part of my role since June 2011 is to move asseets to QBE. During 2 year transition, QBE acts on behalf of Balboa and Bank of America, John Meadows is available.

BASI sells voluntary insurance to BAC customers.

Balboa: John Meadows SVP at QBE First

June 1, 2011 joined QBE. Prior, I was SVP of LPI at Balboa. Today I’m joined by CFO of Balboa prior to QBE, and Operations Risk for Bank of America. LPI protects the collateral. If insurance lapses, we obtained LPI, which is more costly because standard insurance carriers look at the house. Balboa provides portfolio coverage without Homeowner’s Insurance, regardless of location, damage, uninsurable, on fire, etc. extenuating, etc. Premiums in NY are based on Balboa filings in 2004.

In terms of how it works, the tracking vendor monitors to confirm adequate coverage. When we don’t have documented proof, we place and blame the borrower (even if escrowed). Notice sent on servicer’s letterhead. Includes LPI cost (no personal coverage, only collateral).

Borrowers are encouraged to obtain insurance right away (on date of lapse, no matter when lapse occurs).

DFS: LPS is a spiral that you can’t get out. On the other hand, it’s a huge profit center. Borrowers have no idea. It ruins their lives. Assurant’s executive says he hears the stories 3 or 4 times a year.

To what extent in your daily work, how does the borrower factor in?

BofA: I’m not focused on the bottom line. I’m more in the case of multiple times a day or week helping customers personally through these situations. We have 10 million customers, and 1 million are distressed. It’s not perfect. I strive for perfection. There’s a number of complex steps. The customers (and employees and often clients) don’t understand. We have SPOC’s.

Myself as an executive, all the way up to Brian Moynahan, receive the complaints first hand and proactively reach out and try to help to understand.

It is not a distant item. It’s not the bottom line. I do it accurately and timely daily. We create solutions that do help customers.

Balboa/QBE: We support Steve in that. Those issues come to us for background info to help him (why would the insurance company be doing that for the mortgage servicer?)

DFS: My question for the million customers, the premiums are quite high. I take your point Balboa, there’s more risk when it’s force placed and your premiums would come up somewhat, and throughout the industry the loss ratios are in the 20’s. You made the point we approved the rates for a predicted 50% Loss Ratio, and in reality, they’re much closer to half of that. How can we do that for the good of our country (I’ve already stated it a million times…check my blog ;))

(I really like Ben Lawsky. His team is awesome, but he’s completely taking charge. I love it.)

Balboa: If you look at the 2004 rate filing, it was expected 50% if you look over the past 10 years, the actual loss ratio over that period is in the mid 40’s, but you have several years in excess of the 50, so uh, um, etc.

DFS: I understand. I have, for example the Meritplan (also check Newport).

Balboa: in 2010 we voluntarily submitted a rate reduction at that time. It’s a new book of business, but we monitor this business on a regular basis. If they say we need to make a change, we’ll submit it (we’ll do what we’re required to do).

DFS: It stayed loan during Hurricane Irene correct?

Balboa: I’m not trained. In discussions I’ve had with actuaries, once you make a rate change up or down you have to wait a certain amount of time, not just 14 or 15 months (what about 3 years? SPS had 3 years).

DFS: Address the lack of competition in the force placed insurance market.

Balboa was Countrywide originally then in 2008 it’s Bank of America, and then for about 2 years Balboa is Bank of America

Balboa: Almost 3

DFS: In 2011, it’s spun off to QBE?

BAC: Bank of America sold a majority of the assets ($1.5 billion) to QBE for 2 years, blah blah blah (by the way, this was to pay back HAMP bailout loans).

DFS: Didn’t Balboa get an agreement back for a certain percentage of premiums back.

Bank of America: There was $700 million up front, then an earn out I won’t pretend to understand and in addition, overall for the Balboa Insurance companies, Meritplan, Newport, all the companies across all lines of business. Also there’s a profit share agreement. Those have caps to the earn out as well as the profit share. In addition, there are performance deals where Bank of America may be lliable.

Balboa is ultimately QBE starting in June of this year. And 10 years Bank of America will send all it’s business to QBE.

DFS: It seems to be nationwide 90% is with Assurant and QBE and when we see these kind of 10 year agreements, the worry is there’s so little competition that there’s no real effort to keep premiums down, can you respond?

BAC: There are 2 dominant players. The size piece is something to consider, but I have to have an insurance provider that can handle the size of the portfolio. The size and scale, the efficiency.

DFS: It becomes chicken and egg.

BAC: There’s still 80% of the market that’s not with us. I understand, I do, but it has to be balanced with size and scale, have a vendor (Balboa, their subsidiary).

DFS: Bank of New York vs Bank of America, as part of the plan introduced in the settlement is subservicing, which I understand is subservicing for your exact argument. They must handle capacity. Part of the result BAC came to was to chop it up. I guess I’m wondering here whether a similar structure is viable (thus breaking up the big banks).

BAC: I don’t know the details but we have a strategy for servicing and subservicing. That entails moving customers off our platform (They all use the same platform. Run through Fidelity Information Systems and Lender Processing Services).

DFS: Do those sub servicers handle LPI?

BAC: yes, separate from Bank of America. They handle all of lender placed activities with Assurant, QBE, and other providers. We’re not affecting who it is.

DFS: so when you entered the quota share agreement with Assurant those won’t transfer down to the subservicer

BAC: No, taxes, insurance, etc (i.e Escrow Services) gets transferred to the new servicer and then we delete everything. They’re gonna use the tracking services and administrating process, but I don’t control them, I don’t wanna control them (them is Balboa).

BAC: They’re underwriting individual risk, but the voluntary have decided where not to write. We have to write all risks, so part of the challenge is how can we get voluntary insurers in the market?

DFS: At one time there was Countrywide that did everything. It packaged loans, serviced loans, and provided insurance. It’s take as it comes. When Balboa was Countrywide had all the underwriting, many subprime. Did Balboa have any access? (YES!!!! System of Record information on an AS400 based system, which shows all loan information)

Did Balboa have that benefit when getting a sense of liability?

Balboa: The answer is no, we have no access to that information J (fucking LIAR!! HAHAHA, oh Balboa…you can’t even hide your corruption).

DFS: So for a policy the company earns both an earn out and profit share.

BAC: I don’t know

DFS: so every policy to QBE a percentage goes to Bank of America. If Bank of America is being paid twice and gets a percentage, what incentive is there to keep premiums down.

BAC: Bank of America doesn’t set the rates it’s up to QBE (actually it’s up to Balboa). The premiums have nothing to do with commissions. It’s BAC trying to get fair value for their assets.

We don’t know. I wasn’t involved.

DFS: You could have taken $1.5 billion instead right?

BAC: I wasn’t involved *swallow*

BAC: We rely on the insurance experts. They’re supported by actuarial practices and GENERALLY filed through Bank of America through contracts signed on a go forward basis.

DFS: But sorry, QBE First is taking over where the prior ratios were far far less than what the rates were both for QBE and Balboa and the Loss Ratios don’t match on any side.

BAC: I didn’t know, but I do now. I don’t have that formulated how, but annual certification from QBE is first and foremost.

DFS: with BAC getting Balboa and that integrated operation the customer is unclear. It’s one thing if BAC is servicing the trust it is a customer of the trust. It owes obligations in the trust. At the same time, it’s bound to reasonable servicing standards for these trusts, so BAC is being pulled in several different directions. The homeowners are suffering, and at the end of the day the investors are picking up the tab, and you have Bank of America as the Servicer with obligations to both. Owning the Insurance company providing the insurance. And that is a lot of roles for one family of companies to hold. People are wondering what’s driving it, it’s hard not to look at who’s being served by whom. The customer isn’t so clear so banks can do it right.

It’s an inappropriate product to protect the collateral?

BAC: It’s very complex. There’s a lot of complexity. There’s multiple investors we must comply with. That’s one element. We’re introducing an insurance product (actually service). There’s no easy solution (there’s an easier one than you’re pitching…regionalized and localize banks)

Blah blah blah

DFS: Something more straight forward and simple. You need to make them reassess and if you don’t, we’ll do it, and if it ain’t reasonable, we can’t certify, and if we can’t certify, we can’t buy your product. You have an obligation.

BAC: That’s on QBE, QBE, QBE

Can we predict the future, blah blah blah (sounds like an insurance problem, not a mortgage servicing problem).

DFS: is a Minimum Loss Ratio set by us good for you?

BAC: I’m not qualified to say what a Loss Ratio is. It’s complex transaction. If it’s approach take make sure the last thing I wanna see happen is get left with no major providers maybe like the NFIP, where you don’t have carriers in the flood program.

We want it sound going forward.

DFS: Maybe it’s some sort of requirement . Everything in New York is based on 94 rates when Loss Ratios on Average 86%. Now you’ve got Loss Ratios in the teens.

BAC: I agree once every 18 years isn’t good. It does seem like a long time to me.

DFS: Different rules in Different states. Homeowner Notification. Something that came up in the earlier panel and yesterday as well as well as from foreclosure advocates. When they get Bank of America mail, but then they get letters from Balboa or QBE they know nothing about, the worry is they won’t pay attention, so I wonder maybe you’re notifying with the mortgage statement. Or putting them into the statement.

BAC: The notices go out under BAC Letterhead (Inside the envelope). We make sure it’s Bank of America. Including them in the statement is…there’s a lot of info. Escrow Analysis on Page 2 (also related to Force Placed Insurance, so make it subset b on page 2, son).

I’m not sure. Would we confuse it more? There’s tradeoffs.

DFS: Put it on the first page.

BAC: We tried to make it a letter as much as possible to reorder the statement. Don’t rule it out, but it’s gotta balance with what’s there (like in your escrow account…it’s the same thing)

DFS: Anything on the envelope saying it’s about your mortgage statement and not a solicitation?

BAC: I’ve focused on this a lot for the last year (Auto is just a postcard).

Balboa: When a lapse occurs and letters go out for the Tracking Management, they all went out on the lender’s letterhead (inside the envelope) so the borrower knows clearly who it’s from. Everything is clear (inside the envelope).

There’s no contents, no liability to catch their attention so they’ll respond and 50% respond. Those that don’t it repeats. Nothing is on the envelope.

DFS: Can I change topics? Housing advocates brought up troubling points. One fact is LPI issues, penalties, etc had interfered with a Loan Mod (HAMP).

BAC: It’s an interesting consideration. 31% helps the customer. We’re proactive.

DFS: when there’s escrow do you pay their voluntary insurance?

BAC: To frame it, the majority are escrowed. Approximately 80% are escrow. There has been pricing incentives relative to their rates to have an escrow account up front (as opposed to tacked on later). It’s more seemless. We’ve done it in the past. 85% is a pretty good number. The bigger is those distressed. BAC is developing a process to proactively reach out to non-escrow account to ask if we can SET UP AN ESCROW ACCOUNT FOR YOU AND CHARGE IT TO YOU IN ABOUT A FEW MONTHS (!!!!!!!!!)

We can set up an escrow account and advance your premium in advance for every customer. We’re working on that for every customer (It’s something you MAY be able to look at LATER?!?!?!)

I don’t have the details of your agent (why not? Their agent is Balboa. You own Balboa)

We’ll be proactive, etc etc

DFC: One of the warning bells is delinquency. Can they tell them at 30 day delinquency?

BAC: Escrow today, even if delinquent? The Non Escrow we have the effective and expiration but it’s an interesting concept of if it’s paid for a full year (almost always) or month by month (like REO, which they process billing for covering the servicer).

DFS: Lack of underwriting explains premiums. Historically before the sale, BAC/Balboa had Meritplan (and Newport) Can you explain Meritplan?

Balboa: Risk based through Meritplan was a little different than what was seen previously (fiddles with mic).

Can you hear me?

Sorry about that. Yes Risk Based, but different than normal product. Taking in account age and square footage of the home, occupancy risk, etc.

The idea is to mix risk (loss from REO to gain for LPI). Territories, etc, blah blah blah

This was in 2004, but didn’t begin until 2008.

BAC: both these programs, no one at the time anticipated the economy crashing.

Ultimately the writings aren’t until 2008 (trails off).

Balboa: in 2010, we reproduced it. (so they started RBP, Risk Based Premium in 2008 for one lender…IndyMac Federal. Then in 2010, they rolled out to Aurora Loan Services and PennyMac, a Countrywide spin off)

Vacancy rates, but they can’t find the homeowner so they’re sending a letter to a house they know is vacant? An unmarked letter.

DFS: Assumptions going back in history are really not relevant to today and we need to revisit this?

Balboa: That’s why we monitor the program. We’ll continue to actually do that. It’s the Actuaries looking at factors and making change (Michael Jackson looked at the Man in the Mirror for that)

BAC: It’s low probability in New York but very large extent (not according to Chase).

How do you determine rates?

DFS: what about catastrophic reinsurance?

BAC: That’s for solvency issues. It’s really against the 1 in 50, 1 in 100 year event. There’s a deductible is cost prohibited to get 0 exposure it would have been $200 million per event. And with multiple events that occurs as well.

DFS: That’s true. We’ve heard similar explanation other places but for factual event, Balboa went through Katrina with everyone else in 2005 and you had a loss. You made up that loss in less than one month of profits in 2006. (pauses and laughter)

We’re gonna end a little early and be back on Monday for GMAC, American Home Mortgage Servicing, Inc, and an Advocate. It’s unclear for the public who’s here I may get called out of town, but my hearings will go forward.

Paraphrased Chase Testimony to New York's Department of Finance Today

Friday Force Placed Insurance Hearings, Day 2:

Late Start 7:17

DFS - Ben Lawsky, Joy Feigenbaum, Daniel Walter

Great summary of yesterday’s events from Ben.

Everyone swears in.

Chase Insurance Agency: All mortgage agreements need hazards; fire, wind, flood. Protects collateral. A small percentage do not (no percentage given). They will perform the service of buying LPI. 2 Calls to the voluntary carrier, notify homeowner to avoid LPI.

Chase is adding 5 to these 8. They’re also blah blah blah…(I don’t like this guy already)

1.3% of Chase borrowers.

Escrow – 70% of 1^st lien

90% Chase pays premiums through Escrow

Escrow/Non are treated the same

Sole Provider – Assurant with prices relative to peers (of which there are none, except Balboa)

Port of share arrangement.

¾ of LPI premiums for ¾ of written loss

10% commission on net flood, 4% wind

We comply with state and federal law (i.e we require what we’re required to require)

Select Portfolio Servicing – (Was once a Balboa client. Only recently switched to Assurant)

Rare instances borrowers fail. Borrowers fail. Select advances 2 Retail policies for every 1 force placed (at’s 33% of Borrowers with escrow accounts that failed).

It’s not in default because we don’t tell credit agencies.

Many years after the fact. There’s no statue of limitations on a retail policy (although in the Fidelity Information Systems/Lender Processing Services system, anyone can tell you Tracksource rules won’t automatically cancel more than the current term. Only an operator can touch these accounts. At this time, Balboa/Assurant makes the decision for Select Portfolio Services)

DFS: why are you paying a premium where a portion of that premium (50%) to the bank?

Chase: Someone’s gotta do it. We just kept what we had because if someone’s gonna take that risk, what position are they going to be in to do that. I can see how someone would think that. People in Chase are very focused. Most servicers do, we’re above and beyond them.

We are telling on your statement, we’re thinking about putting it on Chase.com 12-24 months, it’s more dominate now.

DFS: why 75%?

Chase: Somebody’s gotta do it, who’s in a position to? (ummm…every insurance company in the world…everywhere).

DFS: Reinsurance by Bank One?

Chase: (nodding)

DFS: Bank One is Vermont captive insurer

Bank One: it’s regulated by Vermont regulators. We’re undergoing an exam. They want detailed annual filings 5PWC, reserve adequacy $340 million in capital surplus, more than sufficient to fund a catastrophic

We began through Lloyd. In 2006, it wasn’t a separate line of business (with insurance services for our line of business).

DFS: Do you have sufficient knowledge of Vermont laws to understand why it was chosen?

Chase/BankOne: No

DFS: Why does SPS want to be in the circle.

SPS: Not originating new loans ourselves and get new business (meaning, they buy these “select portfolios” that they choose to service. They buy shitty loans on purpose).

We have to maintain our reputation in order to attract new business (banks with struggling borrowers.)

DFS: The perception is when the purchaser, SPS, is also on the other side, taking 50% of premiums paid, the competition for low pricing is reverted.

SPS: In every case we have an opportunity to maintain their coverage, we do. Approximately 2 to 1 we paid it through their escrow (which is 50% of their portfolio so half of you have 2 to 1 odds of having force placed insurance just by being in a Portfolio that is Selected for Servicing)

DFS: Do you price shop for lower rates? Would you agree to a 50% coshare meaning you’re getting half the profits that impacts your price shopping?

SPS: We don’t participate in the rate setting process. I don’t dispute the fact that there’s limited number of parties. Without being party, there’s a limit of providers. (no there’s not…not for Insurance, which is force placed…only for “Force Placed” Insurance.

I’m not a business expert.

Chase: We talked to the oldest and biggest insurance companies you’ve ever heard of, but I don’t know who any of them are. (he struggles with microphone).

What we said is. We approach these voluntary companies, we’re gonna send you anyone in the beginning stages. Just get them a voluntary policy. Leads with no cost, no revenue, no rate reduction. We have done things. We found an Aggregator that is going to be able to work with us. We have nothing right now, but umm…we’re like trying really hard, we totally swear.

Chase is the only one thinking about doing that. We can do it by the 4^th of July. We’ve been on this for 6 months. Last year, late in the 3^rd quarter. We reached out to all of them, they wouldn’t return our calls.

Chase doesn’t want compensation. We’re doing it for the borrower to provide a solution.

2004/2005 – Chase losses were over 50%. Since then, I’ll values have increased 8 fold. Default rates, elongated foreclosure process. Premium growth can’t be predicted. Our placement rates have doubled.

DFS: You play no part in the rate making process. Clarify?

Chase: Ask the Insurance Carrier

DFS: I’m talking about a rule against charging less than Cap Rate.

Chase: They have to go with what’s approved including arbitrary being justified along with rate discrimination

DFS: That’s a different question. I’m saying the same product. I would be surprised to know an insurer in NY with a Cap couldn’t enter the market.

Chase: Assurant! Assurant! Assurant! We recognize the Loss Ratios

DFS: An approved rate is between an insurance company and a lender. It’s acceptable to charge X by Assurant as a rate to the lender Chase. Now the Lender Chase has to figure out what is being charged for the force placed policy on the homeowner. Correct?

What percentage is Chase?

Chase: 12

DFS: You’re a pretty big customer, have you talked to any insurers and used your clout?

Chase: Um. We asked for rates. They came back and said they were actuarily justified on a quarterly basis. Assurant Assurant Assurant

We didn’t price shop.

DFS: you’re not simply the Servicer, but you’re taking 75% of the risk. It’s a significant consideration.

Chase: Assurant Assurant Assurant. We don’t know anything about Insurance, because we contract all insurance matters (as stated yesterday by Assurant) are handled by the Force Placed Insurer. Your Voluntary Carriers like USAA, Farmers, Allstate, State Farm, etc, didn’t want to do the mortgage servicer’s job. They know better. It’s wrong. Assurant and QBE will do it though.

DFS: Incentives to pay claims? They collide.

Chase: kind of I understand the question but I uh I uh I you know I uh don’t see that as an incentive for the servicer or the insurance carrier or the reinsurance carrier.

DFS: But let’s assume they’re a profit making company, don’t they get paid more?

Chase: Rates drive loss ratios and catastrophic event. Assurant has their own claims adjusters. They utilize independent agency adjusters. I had boots on the ground for the CAT management team in Katrina and seen how they respond to the borrower who we don’t want to get full settlement under the T&C of the policy.

DFS: When you advance the funds, what efforts do you undertake? (None. Assurant does that)

Chase: I don’t know Operations. We outsource that to Assurant.

I think the answer is they go through all the contact stuff, 60 days later you get a policy, before that you get a binder then a new policy. You will know you have insurance and you will know who to contact in the event of a claim.

DFS: What’s the percentage of claims paid as the number of claims made?

Chase: I do not (again…all run by Assurant)

DFS: One more question if I might. You ceased accepting commissions since we started looking. How did it relate to Fannie Mae’s guides?

Chase: Zero

If you tell us what to do, we’ll do it.

If a carrier can’t pay claims, they won’t write business, for example, in Florida.

DFS: The last 5 years Loss Ratios in NY 11.52-21.29% over the last 5 years, provided by Chase’s counsel.

Also 17.42%, and you also get your share of Catastrophic coverage.

Why can’t you tell Assurant if that’s your concern?

Chase: We rely on Assurant. Assurant. Assurant. Tell us what to do and we’ll do it.

DFS: 12 year low loss ratios

Chase: We rely on insurance. They look at 20 year events and bigger.

DFS: in 20 years you’re profiting off suffering. Hundreds and thousands of people.

Chase: Let’s file rates with New York and move on

SPS: We’re getting too much credit. Some of those loss rates aren’t mature. There won’t be any change between what’s actually occurred.

DFS: For 3 storm years, your analysis including expected losses were gone. No future claims for 2006, 7, and 8.

SPS: I don’t know about 3 year projection. I did a projection. I was thinking 3 won’t change.

DFS: That’s my point. You were dead on for those 3 years.

SPS: We don’t forcast any losses. It matches actual.

DFS: That’s good. I’m beating on your horse, but why no business discussion with Assurant to bring those numbers far more in line? Is that regular? Is that a part of your business?

SPS: Not to this point

DFS: One might say the reason is a conflict of interest.

SPS: We can make one mistake 365 days a year, and it can ruin our reputation and dry up any business. We’re energized to do what’s right the right way?

DFS: Don’t you have a stake in both sides?

SPS: I understand the question and the perception, but it’s a much larger benefit to us to have the strong reputation and keep borrowers, investors, and regulators happy.

Perhaps on regulatory, I couldn’t answer. Keeping the borrower happy and balancing it with investor needs.

DFS: Speaking of investors, you advance premium. At the end when it liquidates, you get those advances back. You specialize in distressed properties. A good portion of your portfolio will be liquidated

You made note of the fact you advance these funds and wait, most often when it’s liquidated. During that period of time is you don’t charge interest. So force placed is an expensive proposition. The ROI on the advance has got to be pretty low. So in order to offset that diminished ROI, are you taking into account the quota share returns you’re getting as a function with your agreement with Assurant.

You’re losing money on Force Placed. It can take 18 months. You’re not charging interest. At the end of the day you’re lucky to get the money. You’ve gone a long time putting money in with no return. What makes up for that blaring loss? In your ROI do you consider you get a 50% quota share and making a lot of money in premiums?

SPS: 2 ways to answer the servicers advance funds in a variety of situations, including LPI. Our pricing model takes LPI contributions into consideration.

There’s a variety of revenue streams. Top of my head last year, this product contributed 14% of revenue.

DFS: December 2010 you stopped commissions

SPS: December 2011

DFS: but at the same time you increased your quota share almost dollar for dollar. Why?

SPS: We challenged P&P’s and looked for Best Practices to be at the forefront, so we did away with commission and increased quota share.

DFS: So they’re equal

SPS: for more risk

DFS: did you lose money?

SPS: Not to date, no.

DFS: what about the other 3 states including New York?

Do you know if you’ve made more money to date than you were making with the commission arrangement?

SPS: I don’t

DFS Please follow up. And in leading best practices. What about commissions at that time was being undermined as a best practice. It’s a cost of doing business. Why were these things changing?

SPS: I don’t know what I’d offer except energy like this. The market is questioning it, so now we are (again, doing what we’re required to do…as a BEST practice)

DFS: Back to Chase, what do you 2 idiots do?

Chase: Vice President of 2 companies. Buncha letters. This is the first time they manage to answer without blaming Assurant ;)

DFS: How much has Chase earned nationally over the last 5 years based on quota share and commissions?

Chase: Last year $200 million, numbers going up because of default rates. There’s 2 significant dynamics.

DFS: If you’ll accept my math $660 million made by profiteering?

Chase: Yup

DFS: How do you book that? When cost is incurred or when it’s paid?

Chase: The premiums and losses on a monthly basis disbursement.

DFS: So this is actual cash that’s come back?

Chase: Yes

DFS: And you had the potential to produce even higher profits but didn’t go that route, was that quota share?

Chase: Yes at 90% to Balboa.

DFS: Thank You (Thank You again, Joy :D)

What services are provided?

Chase: Monitor KPI for Placement

Negotiate Pricing (outsourcing)

Product Oversight

Safeco, blah blah

DFS: So you paid Assurant to retain themselves

Chase: Blah blah blah

It’s standard. There was no negotiation. Nobody did any kind of what type of time was being used for this.

DFS: How many employees do you have?

Chase: 206 intimately involved.

DFS: How many are devoted to the services you spoke about?

Chase: Myself

DFS: Because terms were negotiated in advance, did you provide minimal services for commissions received.

Chase: It was permitted by law.

DFS: But you didn’t provide what (Farmers, Geico, etc) do. How many people work at Bank One.

Chase: I can’t speak to other lines of business. But roughly 8 employees and 4 directors for Bank One.

I couldn’t say.

DFS: Did Chase own Assurant?

Chase: I dunno. Until 2007? I can’t address. We own less than 1% and less than 5% for our customers.

DFS: Did they at one point own 9%

Chase: Runaround

DFS: It’s public record. We’ll get it. 70% of the mortgages you service are for Escrows and on 97% they advance funds? Have these always been the statistics. Since when?

Chase: My guess is that over the last 3 years it’s pretty stable. I think those are cancels for underwriting reasons.

DFS: What about non escrow? What percentage is coming from the 3%

Chase: I don’t know

DFS: The new July 4^th insert will be included with the mortgage statement?

Chase: Yes with shiny colors.

DFS: Claims. What does Chase do to inspect properties?

Chase: We review data. We don’t personally inspect an REO. We audit their claims practices for Assurant, and in 2005 I went out with field adjusters (working for who? You don’t do that)

DFS: I was directing toward vacant homes that have not been liquidated so there’s no inspection?

Chase: I believe if we know it’s delinquent, I can’t speak to it with certainty, but I believe there are property inspections that do take place by our request to a property management company.

DFS: We’d like more details on that later. You referred in written testimony to a number of agreements that Chase is not a party, but you did note Chase is in compliance with Goldman Sachs, etc regarding LPI.

Reasonably priced policies.

Chase: How does the OCC define reasonable price. Clearly for us, there’s few carriers, and Assurant was at or below other Insurance companies provide, so we call that reasonably priced.

DFS: but the Loss Ratios of 11%-21% I take issue with being compliant

Chase: Ok.

DFS: We’re finishing early. Thank you. I know it’s not easy. We take seriously your desire to want to be leaders respectively in the industry and I look forward to working with you.

Last thing, we’re gonna put your full testimony on the record, and we’ll be convening again in an hour.

**End of Chase Interrogation…this is starting to get better and better with every passing moment.***

New York Department of Finance's Inquiry into Force Placed Insurance

As just your average unemployed consumer...I'd like to present my notes from today's hearings on the legality of Force Placed Insurance as a product. I personally believe it should be a service and only be allowed a fixed rate for the process of procuring insurance for the borrower.

Anyway, here's some notes I paraphrased while watching today's hearing, in case it helps anyone:

Force Placed Insurance is handled entirely by the Force Placed Insurer.

Assurant – 1 – Safety net throughout the United States. He talks really fast, haha. We act on behalf of the mortgage servicer. 13% and 2% Refund rates. (**Refund for that period, but not for the prior term they backdated. It’s only prorated for a year. You’d have to have your insurance agent/company send the bank 3-5 years worth of policies in order to get a full refund.**)

QBE – 2 – QBE Insurance Corp/QBIC, QBE First 3000 employees, headquartered in Atlanta. He’s focusing on Hazard, and not mentioning Flood, Wind, and Auto. Acting on behalf of the Servicer.

(***$200,000 & $130,000 are the highest priced houses in QBE’s portfolio to “show off” having paid. The average house price in the use is $242,000.**)

Meteorological.

DFS: 90% of New York LPI market.

Assurant: Growth from connection with the right clients at the right time (Borrowers in foreclosure).

QBE: High Performance Levels (undefined). 45% in New York.

(**Lawsky is AWESOME!! J Making them compete with insurance companies.**)

QBE: Minimum Loss Ratio so low because catastrophe exposed (**however they’re only exposed to 20% of the dollar**). We would need to readdress our business model.

(**Lawsky calls it a product, but it’s a service. They’re representing the bank and buying insurance for you. They’re just only buying their own insurance.**)

Assurant: Unrealized Losses. History has shown us, it’s always been this way, when the borrower leaves, (**i.e. foreclosed on, why else?**) there’s losses. (**This is REO Insurance, not LPI. They’re funding REO losses with LPI gains**)

QBE: Business tends to be in concentrations of people (**i.e condos**) on the coast (**i.e taller buildings**).

Reinsurance with limited market. Sophisticated models.

Assurant: 50 States. 55% from CAT-Prone States, 2004/2005 were challenging. New York

(**Much higher than the $200k and $135k tragic losses to rebuild he reported earlier.**)

Assurant: we pay dividends and these premiums are a part of it;

A website, call us (**in the name of your servicer, but to the insurance company’s website. Why can’t the borrower just submit their insurance on their bank website. Can you submit your Dec Page on your Bank of America website or Wells Fargo Website or Chase Website?**)

Colorful Inserts

Shortcuts, Huge Spike

Assurant: - We’re Reactive (**not proactive**) Meeting Call Response Time Standards. I’d be happy to walk someone through the process to dispel myths.

QBE: I concur (**Should prove by providing servicer contracts**).

QBE First Accuracy & Error Rate: No, but “extremely high levels of accuracy in the high 90% range”

False Placement Rates are relatively low low 10-12% range

Assurant: Accuracy is track on almost every level. Each process is tracked with a different way of how to do it so the best way is through data reports. We can walk you through it. Exposure Process and lender placement process.

Joy: Describe

Assurant: How we can control false placement. It’s an after event based on the front end.

Flat Cancellation rates.

Change carriers don’t tell servicers. They mention the servicer. Mid teens for escrow/non-escrow

Joy: Who are they talking to?

Assurant: if it’s insurance based in response to a letter or in the client’s IVR are directed to us. (They can never talk to the mortgage company**). Escrow outside of their realm (**although they control the escrow payments, often inflating it**).

Joy: Does Assurant identify themselves as Assurant?

Assurant: It’s client driven. The expertise shouldn’t matter. I think sometimes we identify ourselves (**although ONLY to other insurance companies, not to borrowers, except through letters**). (**It also matters because borrowers can’t submit to the lender website**).

Ben: Why reinsure?

Assurant: Client Reinsurance, Market Reinsurance finances Catastrophe Reinsurance.

Joy: Actual loss ratios over the last 6 years?

Assurant: I don’t know.

Joy: Can you explain why you haven’t lowered the payments?

Assurant: Certainly, clearly you can tell in looking at the Loss Ratios. Driven by losses and premium. Premium has gone up.  There is merit in reviewing. Understanding current conditions from a premium standpoint and unrealized loss for the future (**but what about the past?**)

Joy: Captive insurance.

Assurant: It’s an economic decision. The clients (**not borrowers**) want to do it. It makes sense.

Joy: Help me understand this arrangement aligns the servicer’s interest rather than the homeowners?

Assurant: Why would it be disparate?

Assurant: We don’t see it as an avenue to move profit to clients except the rate would be the same to the borrower either way.

Can’t disagree it’s worked out based on experience.

Joy: Thank you (**no, Joy….Thank YOU!!**)

Why would they pay commissions related to LPI?

Assurant: Over the years it’s been accepted and approved. It’s always been there.

Joy: Do they perform services for these commissions?

Assurant: It varies by servicer. There’s a number they perform. Short list:

Manage rating program

Manage audits

Lender property compliance

Review of all insurance documents

It’s an insurance product with improved commissions.

Joy: Commissions paid were equivalent to Insurance agents in voluntary homeowners market.

In terms of Force Placed and authority is placed on you, you don’t provide significant services.

Assurant: I’ll address it again, there’s a number of services. We watch ourselves.

The clients audit us.

Joy: Profit? Exhibit A

$305 million from 2006-2010

Dividends and profit $106 Million

33% profit

How do you justify these profits in light of projecting a 5% profit.

Assurant: The experience has been better.

Joy: Does LPI contribute?

Assurant: That’s presumptive. I don’t know. I can tell you that uh, if you look at the property the amount of insurance on delinquent loans, most of that come after the loan is already delinquent.

Lion’s Share is put in after rather than before.

Joy: Document Retention Policy resulted in the destruction of emails related to this hearing?

Assurant: I don’t know what kind of documents were destructed. We require what we’re required to retain.

Joy: Has Assurant discussed LPI by email?

Assurant: I would assume so.

Joy: Since then, have you revisited doc retention?

Assurant: We have temporarily suspended the 45 day email procedure pending further dialogue.

Ben: Given your corporate development history:

Empire Fire and Marine created Force Placed Insurance Product in 1997.

The day to day operation of managing that product taken over by ZC Sterling.

In Dec 2008, QBE Insurance purchased ZC Sterling and changed to QBE First.

In 2009, QBE bought Empire Fire and Marine.

QBE: We did not take over their portfolio.

Ben: Ok, once you bought QBE, did ZC Sterling continue to operate the portfolio?

In 2009 they submitted a rate filing with the rates. The rates have never been challenged to date. There’s always a first time for something.

Let’s look at QBE rate filing.

QBE has no experience, it’s adopting Empire Fire and Marine program.

We’d like to see the confidentiality agreement.

27.5% commissions paid to own affiliate QBE First.

QBE First manages process, adjudicates the claims and losses.

Lower loss ratio, more QBE First makes from QBE.

Competitive confidentiality.

Rate Filings

Aspects include lump sum payments

Servicers have insurance agent affiliates and you pay commissions

Amsi 10-20% on premiums paid

Commissions are consistent with commissions paid to voluntary agents. What’s the difference between LPI agents vs a voluntary. Product shopping, etc.

QBE: I believe it is similar. You read a portion. I would suggest the stuff you suggest would be a similar venture.

Ben: Let’s talk about Balboa / Bank of America

Joy: Did Assurant pay GMAC?

Assurant: They’re not a client of ours.

Ben: Back to Balboa. They entered into an agreement with QBE that Is 100%. Balboa exists

And shifts to QBE, the public was $700 million paid by QBE to Bank of America (actually was only $700 million cash plus another $1.5 billion in assets).

Balboa is a very significant acquisition. It brought you from 3^rd in line to 2^nd in size.

There were other components. In particular, there was a 10 year agency agreement between QBE and Bank of America or Balboa?

QBE: I don’t know the signatories.

Ben: But Bank of America family companies including a commission that gets paid from QBE to the BofA folks for a period of 10 years. It’s been structured as net premiums.  Speak into the mic.

In grappling with this, this creates an incentive to place further policies. They Service 20% of mortgages in the United States. There’s a correlation.

QBE: What’s important to understand is the process is blind to the individual or situation other than the fact that the process looks for lapses in insurance products.

Ben: Is there a relationship to the bottom line? That’s impersonal as well. I’m trying to get an understanding of a percent premium to Bank of America. 8 year relationship agreement as well.

That results in a payment from QBE to Bank of America based on volume. A half a billion dollars to Bank of America

QBE: We’d be happy to talk to the people involved.

Ben: What the public perception is there’s intended (**video cuts out**). Folks view this as inter related.

We’re trying to get an understanding of what the incentives are that control this.

Economically it has an enormous impact.

My last question, what’s the percentage of claims paid as a function of claims made?

100 claims filed, what does QBE pay on average?

QBE: We can try to do some research. Not that I’m aware of. Can we go back and research it?

**Tomorrow from 10 AM-5 PM

Chase’s servicer is refusing to show up.

Representatives from Bank of America, Bank of America Insurance, and Balboa will be present**