[I am away from the computer on a daily basis, and will not be returning
e-mails until September 10th. In my place are daily commentaries from a
series of very knowledgeable mortgage industry people with different
backgrounds, and they have been given very little direction about what to
write about - the latest is below.
Our views may or may not coincide, but I thank them for their time in
volunteering and helping out.]
It is always interesting to listen to the owners of mortgage companies who
share their view of Mortgagee's Errors and Omissions, Professional
Liability, and Fidelity
Bond policies. Many have a perceived notion that there is complete
coverage for
things like repurchases or indemnification requests. There are others who
have the view that "It doesn't cover anything. I would get rid of it if I
could.".
These owners consider the purchase of such coverage forms as the cost of
doing business.
A ticket to do business you might say. Lastly, there are a few who utilize
the coverage forms as an effective risk management tool.
So what does it cover? Why do we have it? Let's do a little insurance 101.
Why do you need these coverages? Freddie Mac, Fannie Mae, Ginnie Mae,
private investors, warehouse lenders and some wholesale lenders all require
the Fidelity Bond and, Mortgagee's Errors and Omissions coverage forms.
Each of the aforementioned has their own specific limit and coverage
requirements (which can be a daunting task
for any insurance agent who does not specialize in these lines of coverage).
Professional
Liability is not required but most lenders purchase the coverage to protect
the company.
Take a look at the details of each:
Mortgagee's Errors & Omissionscoverage provides protection for lenders from
losses to mortgaged properties. Protects against claims alleging:
§ The mortgage interest portion protects mortgagee or owner interest in
under-insured properties against physical damage losses from "required"
perils.
§ Mortgagee's errors and omissions covers liability for accidental failure
to maintain certain required insurance coverages or guarantees on mortgaged
properties.
§ Failure to determine a property is in a flood zone.
§ Failure to arrange for hazard and/or flood insurance, FHA insurance; VA
guarantee and PMI.
§ Liability to investors and to mortgagors when losses occur due to certain
accidental errors and omissions during the warehouse period.
You will notice it does not cover any general error and not one which is
tied to a repurchase demand.
Again, you must have this coverage to meet the requirements of Fannie Mae,
Freddie Mac, Ginnie Mae and other mortgage investors and not all insurance
products meet these requirements.
Fidelity Bondsprotect mortgage bankers from loss due to employee dishonesty.
Depending on the insurance coverage acquired, it may also extend to
attorneys, or other loan closing agents, performing loan-closing services on
a loan originated or acquired by the business. Insurance carriers have their
own definition of "employee dishonesty"
and a general definition for it is "dishonest or fraudulent acts committed
by an employee acting alone or in collusion with others". These acts must
be committed by the employee with the manifest intent to cause the lender to
sustain a loss and/or to obtain a financial benefit for the employee or
another person or entity. The definition specifically states that "financial
benefit" does not include things such as salary, fees, commissions, bonuses,
etc.
Fidelity Bond coverage may protect against claims alleging loss from:
§ From employee dishonesty as well as from any closing agent; can also cover
third party originators and/or servicing contractors.
§ Theft of mortgage investor's money or collateral as required by Fannie
Mae, Freddie Mac or Ginnie Mae, satisfying industry standards and most
mortgage investors' requirements.
§ A loss of property, including real estate documents, on premise or
in-transit, check forgery and electronic or computer crime.
§ Forged original documents.
§ Also includes coverage for robbery, misplacement, counterfeiting,
fraudulent documents and fraudulent real property mortgages.
One big misconception is that the fidelity bond covers third party fraud.
It does
not.
Professional Liability covers the legal liability for claims brought by a
third party in the rendering of (or the failure to render) professional
services. Areas of coverage may include origination, counseling,
underwriting, processing, marketing,
warehousing, closing, selling, or servicing. A Professional Liability
policy may
protect lenders against claims alleging:
· Misrepresentations of the terms of a loan to a borrower
· Non-compliance with TILA
· Non-compliance with RESPA
· Negligent acts, errors, or omissions in the performance of your
professional
services
· Wrongful foreclosure and eviction
· Wrongful acts of third party originators (Mortgage
Brokers/Originators/Correspondents)
or others considered as independent contractors
· Non-compliance with the Fair Housing Act (typically defense
sub-limit only)
· Non-compliance with the Equal Credit Opportunity Act (typically
defense
sub-limit only)
· Wrongful loan application counseling
This is not a required coverage but purchased by nearly all lenders. The
reason
is that it can protect a firms balance sheet by potentially providing legal
defense
and paying settlements/losses arising out of third party claims. Again,
no coverage
if tied to a repurchase demand.
You might be thinking you have more exposure than you thought and you are
probably right. In mortgage banking, there are a number of major areas of
risk that Fidelity Bond, Mortgagee's E&O, and Professional Liability will
not provide protection from.
Here are the most commonly referenced and tied to repurchase liability:
§ Underwriting and eligibility risk
§ Fraud and misrepresentation risk
§ Collateral risk
§ Compliance and regulatory risk
§ Interest rate risk
With the rising number of mortgage defaults and declining home prices,
mortgage fraud has become one of the most costly expenses associated with
mortgage loan origination.
More specifically, recent research findings indicate that "fraud for
property" - where a borrower misrepresents income, employment, occupancy,
assets and/or debts in order to apply for a mortgage loan - is a large
contributor to the overall rise of mortgage fraud.
The most commonly referenced frauds in 2009-2011 repurchases were:
§ Occupancy
§ Income
§ Undisclosed Liabilities
§ Property Valuation
§ Borrower Authentication
§ Employment Status
More details:
[http://r20.rs6.net/tn.jsp?llr=zy6u9cdab&et=1107447260366&s=8721&e=001M5b1NK
HgsZPowlZ8BBXqymkGs78MdjyNrW1DrDfZLnuuOOm5zYToQtdMIuCPHKBJQt0zViJGHNTYsquUdG
SENoINBMjK5OzGxKGqMrQwoiiNZQRts4ReSt6UU6cf9032MfpH7Fa4FytSGhNCChPi_YiBUy5YNe
kmbGe97DF9MS36KJ4053w4UeJAdFTvcLhy]
This is dangerous because regardless of whether the borrower intentionally
or unintentionally omits this information, the risk is passed along to you.
What's the result? An increasing
number of buy-back requests - ending in significant losses. With this in
mind
there are a few insurance programs many lender have already put in place and
perhaps you should consider.
· Borrower Fraud Insurance - As noted above much of the losses the
mortgage
banking industry has faced, often stemming from repurchases, are tied to
borrower
fraud. A program, headlined, Quality Lending Insurance, provides
protection when
you are victimized by the misrepresentation of information in the
application by
a borrower. Whether the misrepresentation is intentional or not
protection is
provided.
· Insured Undisclosed Debt Monitoring - Undisclosed debt has been one
of
the more prevalent types of frauds tied to repurchases in the industry,
especially in the last few years. Investors are diligently looking at loans
for variations in the credit profile of a borrower. Fannie's LQI
requirements clearly show an
increased focus in the area. To combat this risk Equifax Mortgage Services
developed
Undisclosed Debt Monitoring(TM) which is a system that monitors the "quiet
period"
between the time of the original credit file pull and the closing of the
loan. The platform is "always on" - which means the borrower is continuously
monitored and daily alerts are provided to the lender that may represent
potential risk associated with mortgage loans in their pipelines. This not
only detects potential risks it is a more efficient way to manage your loan
pipeline and review credit discrepancy
from application to close. While it significantly reduces the exposure to
undisclosed
debt, Equifax took it a step further to assure their clients have a complete
solution and coupled an insurance policy to the program to cover losses
should undetected liabilities result in a repurchase demand.
· Appraisal Warranty Insurance - With borrower fraud being covered
by or
in part by the program referenced above that leaves appraisal risk These
programs cover financial loss arising from error, omission, action, failure
to act, breach of contract or breach of duty by the Insured (appraisal
management co) in the rendering
or failure to render their Professional Services. The action must result
in the
stated value deviation, generally 10%, from the original insured warranted
appraisal report.
A number of insurance products are truly mortgage specific. The key to
knowing
what coverages you need, the right coverage for your business and the right
cost is working with someone who knows mortgage banking. Many lenders work
with local
agents or different agents for various aspects of their insurance portfolio.
With
some many changes in mortgage banking over the past few years you may want
to consider
working with someone that specializes in mortgage banking. By working with
a specialist
in your area of business, you will likely learn of adjustments or changes
needed to your current policies, be given an introduction to new products,
or participate in the development of new products which can be beneficial to
your balance sheet.
Often those insurance agents in the "business" have relationships, beyond
insurance, that can be beneficial to your business as well.
Go Bears!!
Justin Vedder
Area Senior Vice President
Arthur J. Gallagher, Mortgage Banking Division
p: 415.536.8522
w: www.ajg.com
[http://r20.rs6.net/tn.jsp?llr=zy6u9cdab&et=1107447260366&s=8721&e=001M5b1NK
HgsZOR4vvBqC95hcKLP-5m73WLufZGXKN4Q4TgWCbzSCtK9Yhuz6Snsulmzfni3UISZt_Z-y-C_B
BuqvWuM6C7bu6VbY0YZzAtEY0=]
Rob
(Check out
Occasional paid notices do appear. This report or any portion hereof may not
be reprinted, sold or redistributed without the written consent of Rob
Chrisman.)
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