Let's say you're a homeowner facing tough times. You're starting to fall behind on your home insurance payments, but then, your bank steps in and buys an insurance policy on your behalf. Good news, right? Not if your bank steers you into a policy that's 10 times more expensive than your previous one.
This practice, known as forced-place insurance, is the subject of a probe by New York State's Department of Financial Services into some of the country's biggest banks, according to reports in The New York Times and Reuters. The inquiry, which is already underway, has implicated a number of major financial firms, including JPMorgan Chase, Wells Fargo, Citigroup and Bank of America.
The stories of banks making costly, potentially destructive decisions on behalf of homeowners come as millions of Americans are already trying to cope with diminished wealth due to a weak housing market, which many allege was caused in part by banks and lenders pushing risky loans on homeowners.
Such allegations also recall earlier claims of reverse redlining, in which mortgage servicers systematically preyed on black homeowners and other minorities. Bank of America recently agreed to pay $335 million to settle claims of such discrimination by Countrywide Financial.
With recent natural disasters sending the costs of home insurance premiums higher -- and the seemingly endless queue of foreclosure cases likely to keep home prices depressed for at least another year -- homeowners were already facing a plethora of bad news before the prevalence of forced-place insurance started to become clear last fall, with a feature in the trade newspaper American Banker.
That item made it clear how much banks stand to benefit from guiding homeowners into more expensive insurance policies. In one instance, the Florida-based EverBank allegedly allowed a homeowner's $4,000 policy to lapse, then replaced it with a policy from the company Assurant that cost $33,000. In return for facilitating such a great deal, Assurant reportedly paid a $7,100 commission to an EverBank subsidiary.