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The Credit Crunch: What’s Crime Got to Do With It?

The Credit Crunch: What’s Crime Got to Do With It?. Singin’ The PL Blues. MODERATOR: Edward G. Gallagher, Esq., General Counsel, Surety & Fidelity Association of America PANELISTS: Christopher Cavallaro, RPLU, Managing Director, ARC Excess and Surplus, LLC

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The Credit Crunch: What’s Crime Got to Do With It?

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  1. The Credit Crunch: What’s Crime Got to Do With It?

  2. Singin’ The PL Blues MODERATOR: • Edward G. Gallagher,Esq., General Counsel, Surety & Fidelity Association of America PANELISTS: • Christopher Cavallaro, RPLU, Managing Director, ARC Excess and Surplus, LLC • Phyllis Chechile, Managing Director, Frank Crystal & Company • David T. DiBiase, Esq., Managing Partner, Anderson, McPharlin & Conners LLP • Melissa Mailman Schwartz, Assistant Vice President, Liberty International Underwriters • John Wallace, MBA, Director, Product Executive, CUNA Mutual Group

  3. Agenda • Role of Mortgage Fraud • Pre-existing Losses • Potential Insurance Coverage • Fraud Enabled by the Crisis and New Technologies • Impact on the Fidelity Market

  4. Role of Mortgage Fraud

  5. The Mortgage Meltdown

  6. The SAR Activity Review, May 2006, Financial Crimes Enforcement Network (Fin CEN)

  7. 2006 Mortgage Fraud Report “Year in Review”,Federal Bureau of Investigation (FBI)

  8. If we jump from 2006 to today, the signs are still troublesome. SAR Activity Review, Fin CEN, July 8, 2009

  9. 2008 Mortgage Fraud Report “Year in Review”,Federal Bureau of Investigation (FBI)

  10. Mortgage Loan Applications

  11. Fraud/Forgery Covered Under a Financial Institution Bond? Or….????

  12. Bad Lending Practices?

  13. Loan Application • Inflated, exaggerated or even fabricated income? • Lies re assets/net worth? • Untruth re owner occupied intended use? • Forged signature on application? • Falsehood re source of down payment? • False / inflated appraisal?

  14. Mortgage Loan Purchase and Sale Agreements • Generally with recourse • Reps and warranties include • good title • no undisclosed liens or claims • compliant with HUD • notes are “genuine…legal, valid and binding…” • Buyer’s recourse • seller must remedy any defects OR • repurchase the loan

  15. Cause and Effect • RBC Mortgage Company v. National Union Fire Ins Co of Pittsburg, PA., 812 N.E. 2nd 728 (Ill.) “…RBC losses were derived…from RBC’s breach of the warranty contained in the brokerage agreement. Had there been no contractual liability…for the fraudulent loan packages, RBC would not have incurred monetary losses.

  16. Cause and Effect • Tri City National Bank v. Federal Insurance Company, 674 NW2nd 728 (Wisc.) “…the employees were dishonest by permitting financially inappropriate people to obtain mortgages from other entities…the bank initially lost nothing…It was only after the…mortgages defaulted…and the mortgage companies suedTri City that ‘losses’ resulted.”

  17. Cause and Effect • Ohio Savings Bank v. Progressive Casualty Insurance Co, 521 F.3d 960(8th Cir. 2008) “A banker’s blanket bond is not intended to ensure (sic) the bank against losses from its normal lending activities….”

  18. Cause and Effect • Vons Companies v. Federal Insurance Co, 212 F.3d 489 (9th Cir. 2000) “Direct means direct…”

  19. Pre-existing Losses

  20. Madoff Cases by Type

  21. Stanford International Cases by Type

  22. Potential Insurance Coverage

  23. Fraud Enabled by the Crisisand New Technologies

  24. Impact on the Fidelity Market

  25. Financial Institution Fidelity Limits

  26. Questions&Answers

  27. Many thanks to … • Edward Gallagher • Christopher Cavallaro • Phyllis Chechile • David DiBiase • Melissa Mailman Schwartz • John Wallace

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