PALMETTO, Fla. - Terra Ceia Bay looks gorgeous from Dori Barnett's living room in Manatee County. But the tranquil view has gotten more expensive in recent years.
"Every year, in September, I'd get a notice from the mortgage company," Barnett told the ABC Action News I-Team. "'We have no record that you have adequate flood insurance. So, if you don't give us proof, we're going to put insurance in effect for you.'"
It's called lender-placed or force-placed insurance. A lender decides you don't have enough property insurance to protect its collateral --- your home. Perhaps you've let your insurance lapse, or your lender determines you no longer have enough coverage.
As many Florida homeowners lost their insurance as they fell behind on their mortgages, the Sunshine State has become prime territory for lender-placed insurers.
These specialty insurers stood to collect $981 million in lender-placed premiums from Florida homeowners in 2012, according to the Center for Economic Justice. That gave Florida about 34 percent of the national market, the consumer advocacy group stated during a Tallahassee rate hearing last year.
At that hearing, Center for Economic Justice economist Birny Birnbaum offered no objection to lenders safeguarding the property that borrowers pledge to secure a loan. But Birnbaum says lender-placed insurance is too costly.
"The rates are massively excessive," Birnbaum told Florida regulators. "And they're massively excessive because they're larded with kickbacks to mortgage servicers."
Compared to how homeowners shop for property insurance, Birnhaum says mortgage servicers have a peculiar way of negotiating for coverage from force-placed insurers. "In what other type of insurance do you have a situation where the mortgage servicer has an interest in higher premiums --- paying higher premiums --- so it can get more kickback?" asked Birnbaum, a former Texas associate state insurance commissioner,.
The Tallahassee hearing was prompted by a rate request from American Security Insurance Co., a unit of Assurant Inc. and one of the country's biggest lender-placed insurers.
In a written response to Birnhaum's testimony, American Security Insurance listed 10 duties that the insurer pays agents affiliated with mortgage lenders or servicers to perform. "It is difficult to reach a conclusion that commissions are unjustified and unreasonable using these facts," the American Security Insurance statement reads.
Nevertheless, Barnett says her mortgage payments have gone up $3,600 a year since her lender placed an extra flood insurance policy on her property. Barnett was forced to pay for the additional coverage even though she says she has never missed a mortgage payment and her insurance agent believes she has adequate flood coverage under an existing homeowner's policy.
"It's not like we have to make a payment," said Barnett. "They just automatically take it."
Tampa lawyer Sean Shaw, who used to be the state insurance consumer advocate, says that can create a problem for struggling borrowers. "They can go straight to your escrow account and pull the money out," Shaw said. "And you happen to look at your balance and it's negative $6,000. And you've got an impending foreclosure."
Shaw's law firm has joined a team of private attorneys digging into the fees that lender-placed insurers pay banks or mortgage servicers.
His successor as insurance consumer advocate, Robin Smith Westcott, has been doing the same. Westcott has flagged what force-placed insurers call "commissions" paid to lenders for tasks typically performed by the bank or loan servicer. As a result of such unusual arrangements, Westcott wrote state regulators, consumers are "charged for the costs of the insurer to secure the bank's business."
"Homeowners were essentially overpaying and their overpayment was in the form of kickbacks to certain companies," Shaw told the I-Team.
Shaw's legal team sued J.P. Morgan Chase & Co. and American Security Insurance. Without admitting wrongdoing, the bank and the insurer agreed in November to pay up to $300 million to settle allegations that they overcharged homeowners for force-placed policies.
"Lots of time, lots of discovery, thousands of pages of documents for us to figure out what was going on," Shaw said. "Once you unravel it all, we found that really it was an illusory service charge that was being paid to do nothing. It was kind of a commission that was just a kickback."
Added Shaw: "The average consumer would not have known what was going on at all."
All Dori Barnett knows is she has to find new flood insurance because she and her husband are tired of overpaying for their lender-arranged policy. Barnett has found much better rates on her own than what her lender has been charging. "Eight-sixty-five a year versus $3,600," she said.
Barnett's predicament may be part of a coming trend. Birnbaum predicts recent changes in the federal flood insurance program could create a whole new market for peddlers of the
In October, Florida Insurance Commissioner Kevin McCarty rejected American Security Insurance's rate petition. Instead, the insurer agreed to roll back its rates 10 percent. McCarty's office estimates that could save Florida homeowners as much as $51 million.
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