Homeowners are getting gouged for an extra penny. A New York State financial services agency is investigating several large banks to see whether they fraudulently steered homeowners into overpriced insurance policies. Since the downturn of the housing market, customers may of been so-called force-placed’ into an insurance policy.
JPMorgan Chase, Bank of America, Citigroup and Wells Fargo are among the major companies involved in this fiasco by the office of Benjamin M. Lawsky, the superintendent of New York State’s Department of Financial Services, according to a person briefed on the investigation who asked to remain unidentified because the matter was private.
Mr. Lawsky’s office issued 31 subpoenas or other legal notices related to the case in early October, just as the state’s insurance and banking departments were merged under his new agency. His office has already turned up instances where mortgage servicing units at large banks steered distressed homeowners into insurance policies up to 10 times as costly as the homeowners’ original plans.
In some cases, those policies were offered by affiliates of the banks themselves, raising questions about conflicts of interest; in other cases, there may have been kickbacks between unrelated companies, according to the person briefed on the investigation.
Representatives of Citigroup and Wells Fargo said they were cooperating with the investigation. Bank of America said it could not comment “on an active matter” but that it had a practice of cooperating with investigators. JPMorgan did not comment.
The investigation is yet another legal battle for the nation’s largest banks and points to the sorts of problems they may continue to face nationwide.
The banks, in separate negotiations with federal and state authorities over suspected foreclosure abuses, have been trying to negotiate a settlement with state and federal officials to avoid future investigations, but it is not clear if businesses like home insurance would be covered if a deal were reached.
It also points to one of the many problems that may be holding up the housing recovery. Some homeowners have found it more difficult to refinance their loans after banks tied this compulsory insurance to their loans.
In general, mortgage servicers are allowed to take out insurance policies on homes after a homeowner allows existing coverage to lapse. Though homeowners have little choice and sometimes little notice about the new plans, they often end up shouldering the costs of the insurance through their mortgage payments.
The increased cost is to be expected to some degree because homeowners who missed insurance payments on old policies are risky customers.
However, Mr. Lawsky’s office views some of the increases as exorbitant. For instance, in one case his office is examining, a homeowner who paid $2,000 a year to State Farm ended up paying $6,000 a year to a new insurer.