NY Investigates Big Banks for Steering Homeowners to Expensive Force-Placed Insurance

JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo are under investigation by the New York Department of Financial Services.  The investigation has uncovered examples of mortgage servicing units of large banks steering distressed homeowners into high-priced home insurance offered by affiliates. 

Lenders have the right to "force place" insurance when borrowers let their insurance lapse.  Insurance on the collateral (the home) normally protects both the borrower and the lender from damage to the property.  Borrowers in financial distress may stop paying insurance premiums.  In that case, the lender may secure insurance to protect only the lender's interest if the property is damaged.  The cost of this "force-placed" insurance is added to the borrower's obligation.  

The New York investigation has found instances in which the "force-placed" insurance cost up to 10 times more than the homeowner/borrower's original insurance policy.  In some instances, the "force-placed" insurance was issued by an affiliate of the lender, raising issues of conflict of interest and kick-backs.

Link:  http://www.nytimes.com/2012/01/11/business/big-banks-facing-inquiry-over-possible-insurance-fraud.html

(ag) Jan. 11, 2012, in Consumer Protection, Lending Issues