In a lawsuit filed earlier this month, one of the nation’s biggest residential lenders has accused First American Title Insurance Co. of unjustly denying thousand of claims. But the title insurer still hopes it can still resolve the matter outside the courtroom.
First American was sued this month in the General Court of Justice, Superior Court Division, in Mecklenburg County, N.C. Also named as a defendant is United General Title Insurance Co. which, according to court documents, is part of The First American Corp.
At issue are 2,200 denied title insurance claims on delinquent home-equity loans and lines-of-credit with title defects, according to the plaintiff in the lawsuit, Bank of America, N.A. As of last month, BoA claims its losses on the loans in question exceed $235 million.
In addition, the Charlotte, N.C.-based bank alleges that First American has not been timely in response to another 2,300 claims on loans with which it has suffered more than $300 million in losses. The policies call for claim payments within 30 days, though decisions haven’t been made of these claims for longer than a month — much longer in some cases.
BoA said that before its April 1, 2004, acquisition of FleetBoston Financial Corp. and subsidiary Fleet National Bank — Fiserv Solutions Inc. provided Fleet with the ILS QuickClose Lien Protection Insurance Program for HELs and HELOCs. Fiserv, which operated as Integrated Loan Services, was the insurance agent in the transactions.
The program reportedly enabled lenders to abandon traditional title searches in favor of a simple borrower survey. BoA claims the service included coverage to protect it against risks and losses resulting from not conducting a title search prior to closing. The policies were supposed to cover undisclosed intervening liens, vesting problems and legal description errors — all defects that would have been uncovered with a full title search.
“No limitations or restrictions,” marketing materials approved by First American allegedly said. “Coverage to lender for all title defects impairing lien position in case of default … Coverage for all undisclosed title issues that impair lender’s lien priority.”
BoA subsequently started using the program itself. And the majority of its claims submitted prior to 2007 were paid.
But beginning in 2007, rising defaults exposed an increased volume of title defects — pushing the number of claims higher, according to the complaint. Deterioration accelerated in 2008 and continued into last year. As claim activity rose, First American significantly changed its claims handling process and stopped paying the types of claims it had paid in the past.
Instead of paying claims based on the amount charged off by BoA, First American started using a valuation-based method to determine whether a loss existed and, if so, the size of the payment, the lawsuit says. The revised process now determines losses based on “a supposed value of the collateral property at some point after the loans is in default or after Bank of America submitted its claim.”
First American also allegedly denied claims because BoA had not foreclosed — even though the bank said it either could not foreclose or didn’t foreclose because it made no economic sense. In addition, no such requirement is in the policies.
BoA alleges that the policies were supposed to cover liens that showed up on a credit report with no requirement to ask the borrower about it — though claims were denied because of this. A 2005 letter from First American, however, did note that a statement would be required from the borrower indicating that the lien wasn’t against the subject property. But the claims are being denied because of a baseless “knowledge exclusion” clause in the policies.
Last summer, First American allegedly sent more than 2,000 letters over the span of a few months to BoA requesting documentation that was irrelevant to the claims. Many of the impacted claims had already been pending for several months.
“United General and First American have breached the terms of their policies and breached their duty of good faith and fair dealing,” the complaint says, “by denying Bank of America’s claims that are covered under the terms of the applicable policy [and] by failing to pay Bank of America’s claims in a timely manner required under the terms of the policies.”
BoA was the second-biggest residential lender during 2009 with $391 billion in originations.
For its part, First American still holds out hope that it can avoid litigation.
“United General Title Insurance Co. and First American Title Insurance Co. regret that their valuable customer, Bank of America, has chosen to file a legal action against the companies,” First American said in a statement. “However, we are hopeful that we will be able to resolve this matter outside of court with continued discussions.”
Bank of America, N.A., Plaintiff, v. United General Title Insurance Company and First American Title Insurance Company, Defendants.
Case. No. 10CUSS415, March 5, 2010 (In the General Court of Justice, Superior Court Division, State of North Carolina, County of Mecklenburg).