Loan Documents

AuthorDennis J. Wall
This chapter focuses on the loan documents that most borrowers
encounter when they buy a home. After consulting this chapter, nancial
and legal counselors will have an even fuller background to discuss
the documents and the issues that arise from them at the rst meeting,
and perhaps even at later meetings, with the majority of home buyers
concerning the most frequently encountered lender force-placed
insurance practices.
2.1 Introduction
Between 2005 and 2008, thirteen major banks, most of them investment
banks, issued $2 trillion in residential mortgage-backed securities.1 When
the total amounts paid or projected to be paid in mortgage-securities-related
settlements with agencies of the United States are considered as a cost of
doing business, the resulting gure is 2 percent.
Taking this view means considering the costs of settlement with the U.S.
government for all claims made or that could be made by all of its agencies
arising out of residential mortgage-backed securities as additional costs of
doing business over the course of only four years. Looked at in that way,
these additional costs of doing business in residential mortgage-backed
securities during those four years were 2 percent of the revenue generated
by those costs for the thirteen biggest banks in that line of business dur-
ing that time.2
Chapter 2
Loan Documents
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Only a fraction of the approximately $120 billion in total settlements
made and projected with U.S. government agencies over residential mort-
gage-backed securities includes the settlement of claims over conduct related
to lender force-placed insurance (LFPI). That amount is unknown to the
The total amount of money paid in settlements in individual LFPI
cases simply cannot be calculated. In the rst place, pleadings, testimony,
and documentary evidence that would ordinarily reveal these gures are
almost always kept secret.3 However, even if secrecy was removed as an
obstacle, all settlements arranged in class action cases that have been
found have included both the payment of money and the performance
of services that do not include money and that have not been reduced to
veriable monetary value in any case and in any electronic court le that
has been examined.4
The amount of money received by some banks and their successors
and servicers for force-placing insurance on homeowners-mortgagors
can be estimated, but only roughly. The exact amount of money received
for force-placed insurance is a secret. If it has ever been revealed in any
testimony or other lings in the federal court les that are reected on
PACER, the public’s access to federal courts’ electronic records, then it
appears that the secret has been kept by the device of secrecy stipulations
requesting U.S. district judges and magistrate judges to approve them,
which they generally do.5
Publicly available information about the income from force-placed insur-
ance policies has been located that relates to at least one lender-servicer,
however. The publicly available information apparently does not include ease
of reference to its market share in force-placed insurance, meaning that no
information has been found that tends to show what percentage of all LFPI
is attributable to it, nor over what period of time. Individuals may unearth
these facts in the future, but at this time it appears that we will know little
more than that the lender-servicer in question was a big purchaser of LFPI
over some period of time after the beginning of the twenty-rst century.
With that backdrop kept in mind, some testimony and documents are
available for review on this subject. In a federal case, the rule 30(b)(6) cor-
porate representative of that lender-servicer’s captive insurance agency (a
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subsidiary or afliated company) testied that the lender-servicer in ques-
tion received commissions on “aggregate annual net written premium” of
force-placed insurance in the amount of $400,000,000 each year in 2008,
2009, and 2010 and projected the same amount for 2011.6
The aggregate annual net written premium on insurance force-placed
by that one particular lender—and only by that one particular lender—for
that period of just four years would total $1.6 billion.
People suing in LFPI cases allege that extra money inates the already
high premiums carried by force-placed insurance policies. They allege in
general that extra money is paid to lenders and servicers by way of rein-
surance premiums paid to their captives and subsidiaries, that force-placed
insurance policies are backdated with unnecessarily high premiums to cover
periods when no loss occurred, that unnecessary insurance policies were
placed by force in certain cases, and that insurance policies have been
placed with unjustiably high policy limits at higher premiums, all billed
to borrowers-homeowners.
No pleadings have been located that allege the total amount of all rein-
surance premiums, if any, that were paid on account of that aggregate
annual net written premium on force-placed insurance that the particular
lender placed during those four years. No testimony or documents have
been discovered from court les either tending to establish that amount in
an evidentiary form acceptable to most courts.
However, there is some evi-
dence of the amount of reinsurance premiums received by another lender
for a different period of time.
In an application for attorney’s fees in an LFPI class action case involv-
ing a different lender than the one just discussed, the plaintiffs’ attorneys
represented to the court that they should be awarded attorney’s fees in part
because the lender received “revenue arising from quota-share reinsurance
agreements” totaling “more than $600 million in revenues during the Class
Period” of January 1, 2008, to October 4, 2013. During this period of ve
years and nine months, the lender in that case would have to average receipts
of over $100 million per year in reinsurance premiums in order to reach
total revenues of $600 million from reinsurance premiums.8
To the author’s knowledge, pleadings, testimony, and documents have
not, however, been unearthed in sufcient numbers to gauge
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