By Brian Penny
"As long as they look good when they be doin' bad;/Then the separation from the truth is getting' vast - fast." - Lupe Fiasco, "Strange Fruition"
NEW YORK (MainStreet)--I saw Force-Placed Insurance, the practice where banks force mortgage borrowers to have insurance, bubbling in the media again toward the end of March, but I was busy with my van renovation, yoga, and a few other projects I'm working on. Last night I finally had a moment to read what the commotion is all about. I chuckled for a moment as I read about how the New York Department of Financial Services slapped Assurant (AIZ) with a $14 million "blow" of a fine. There was a time I applauded the NY DFS. I looked up to it way before it was cool (and for the record, I was a hipster way before it was cool too), but if you ask me, $14 million is hardly even a slap on the wrist.
Keep in mind the NY DFS is run by Benjamin Lawsky. Last year people acted like Lawsky was the new Harvey Dent on Wall Street when he fined the British bank Standard Charter $340M for allegedly laundering $250 billion of Iranian money. I did some quick math:
Force-Placed Insurance Profits = ~$45 Billion @$5B per year since 2007 (and going back to 1994)
Around 1996, I got caught stealing a $2.50 X-Men Cyclops action figure from Walmart (WMT). I was fined $102.50, didn't get to keep the action figure, and got 60 days of probation, during which I had to submit to random drug tests, write an essay about why shoplifting is wrong and serve 16 hours of community service.
Ignoring the fact that I'm the only one who didn't get to keep what he stole (which I'm not bitter about in the least) and focusing only on the numbers, here's a breakdown of the crime/punishment ratio:
Crime |Fine |Crime/Fine
- Standard Charter: $250B | $340 | 0.14%
- Force-Placed Insurance: $45B | $14
- Brian Penny: $2.50 | $102.50 | 4100%
At this point I feel the need to point out that I'm not a professional accountant or a renowned economist. I'm not some sort of Will Hunting level math genius either. I didn't attend MIT and never saw a need to progress beyond calc I. I see a few problems with this chart though.
The most glaringly obvious elephant in the room is 16 year old me doesn't belong on that chart. The average American citizen is not treated the same as a corporation. We're not equal. Taking me out of the equation, we can see Lawysky's pulled punch more clearly:
Crime |Fine |Crime/Fine
- Standard Charter: $250B | $340 | 0.14%
- Force-Placed Insurance: $45B | $14 | 0.03%
- %Change| 79.77%
What this tells me is that Benjamin Lawsky hit a British bank dealing with Iranian money a huge fine, but someone got to him and he's been tamed. He pulls punches when it comes to defending his own community. Countless American homeowners were forced out of their homes and into foreclosure because of the Force-Placed Insurance product and hidden escrow fees (often on loans that borrowers don't even have an escrow account on). The process is being applied to more and more consumer products.
Assurant (whose largest shareholders include Vanguard, State Street Corporation, and AQR Capital Management, among others) and the Balboa/QBE First collective run the same processes, products, and procedures on auto loans, cell phone insurance, etc. Any collateral loan is at risk. I was so annoyed thinking about it that I had to email Joy Feigenbaum, a DFS Superintendent who questioned the banks with Lawsky during the Force-Placed Insurance hearings last year. We met and spoke a few times before and during the hearings.
I explained to Feigenbaum how annoyed I am that the DFS, CFPB, FHFA, NAIC, and every other regulator I tried working with in this country fails to see the problem with Force-Placed Insurance. She hasn't responded yet, and I don't know (or particularly care anymore) if she ever will. I'm at the point where I'm tired of even trying, so this is the last time I explain what I've been trying to explain since the first time: There are 5 parties involved in Force Placed Insurance:
- The Consumer - You. You are also the Taxpayer.
- The Investor - Usually Fannie/Freddy/VA/FHA...i.e. the Taxpayer...i.e. You.
- The Loan Servicer - Bank of America, GMAC, Wells Fargo, etc. ("The Banks")
- The Insurance Tracker - Assurant/QBE First...contracted by The Banks to manage all insurance processes and transactions (and so much more)
- The Force-Placed Insurer - The Insurance Companies we're all focused on during this scandal, Assurant and QBE First
You'll notice Assurant and QBE First are two parties in the above list. We, the consumers and taxpayers, are two parties as well. So here's my last attempt at explaining to any journalist, attorney, homeowner, regulator, politician, or anyone else on this planet how Force-Placed Insurance is fraudulent and will continue to be so long as it continues to exist:
The Loan Servicer is paid by the Investor to perform any required service on his loan portfolio. They agree on a documented contractual cost to service each loan, along with other parameters in what is called a Service Level Agreement (SLA). The Loan Servicer figures out the most profitable way to utilize its resources and outsources certain specialized functions to third-party vendors. One such process is any operations, customer service, process development, quality control, auditing etc. of insurance and escrow services to an Insurance Tracker company.
The Insurance Tracker has an SLA with the Loan Servicer to provide a lower cost per loan. The Tracker accomplishes this through hidden kickback schemes and by sometimes eating a loss because it doesn't matter. Insurance tracking is less than 10% of Assurant/QBE First's profits. The lion's share comes from their Force-Placed Insurance business. Think about the scenario this creates. These companies are paid $1 to decide whether or not you need their $100 insurance. I can't even blame Assurant/QBE for squeezing every last dime out of the American public at this point.
If you paid me $1 to decide whether or not you owe me $100, I would find the same answer more and more often as the decades pass by too!
A fine won't fix this problem, especially not such an insignificant one. The only way to fix the problem is to disallow Insurance Trackers to act as Force-Placed Insurers. The product of Force-Placed Insurance also needs to be abolished and replaced by a service of Force-Placing Insurance. I'd rather be charged $35 for the convenience of having the bank price shopping insurance for me. They have access to all of the information necessary on the house. They're the ones setting the rules for the insurance companies. They have the market clout. Why is this not happening?
It's only when these types of real changes are implemented that we can truly recover from the crimes the financial sector continues to commit.
Brian Penny is a former business analyst at Bank of America turned whistleblower. He documents his experiences living in a van, working with Anonymous, training to be a yogi, and fighting the banks on his blog.
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