Bank of America is suing its mortgage insurance company Old Republic Insurance Company over denied claims.
The Charlotte-based bank says the insurer, which Bank of America paid to insure it against losses on potential borrower defaults, is "manufacturing excuses" to deny claims.
In a lawsuit filed last week in district court in Charlotte, it calls Old Republic's conduct "aggravating and outrageous," and says Old Republic is making "unreasonable interpretations" of the requirements in its policies.
Old Republic says it is denying claims where borrowers misrepresented themselves or where the bank is missing paperwork, according to the lawsuit.
The bank replies that borrowers didn't misrepresent themselves, that Old Republic had ample access to Bank of America's loan books, and that any missing paperwork has "nothing to do" with the claims.
"This is just the next phase of the crisis," said Keith Gumbinger, vice president of mortgage analysis firm HSH Associates.
He said he hadn't heard of any similar lawsuits but expects more to appear as banks try to offset their losses on mortgages, which could spiral as the banks are forced to buy back soured loans from investors. "With all the losses in the past couple of years, everybody's trying to recover their money any way they can."
"You kind of knew it would happen sooner or later," added G. Martin Hunter, a Charlotte attorney who represents borrowers in foreclosure cases.
Bank of America says that between 2002 and 2007, it paid Old Republic for insurance to cover some of the potential losses on some $2.2 billion in loans. Bank of America says it insures "a percentage" of the loans it originates, but didn't give any specifics.
The bank says it has paid more than $40 million in premiums to Old Republic, and continues to pay more than $870,000 each month.
According to the lawsuit, Old Republic's advertising promised that when a borrower defaults on an insured loan, "it becomes our expense not yours."
"You have no aggravating foreclosures that waste your staff's time ... which can be better spent generating new loan business," the insurance company told banks, according to the suit.
As the housing crisis erupted in 2007 and more borrowers defaulted, Bank of America submitted more claims to Old Republic. The bank said Old Republic has denied valid claims on "thousands" of loans, denying three times as many as it has paid. The bank also says that claims paid by Old
Republic fell 75 percent from 2009 to 2010. The bank says it has $28 million in pending claims and another $31 million of claims that Old Republic says it cannot process.
Bank of America is requesting damages of more than $160 million.
Old Republic is based in Pennsylvania but its mortgage unit is based in Chicago. The Pennsylvania office referred calls to Chicago. Messages left at the Chicago office weren't returned Wednesday.
According to the lawsuit, Old Republic says it is denying claims based on misrepresentations by borrowers and other problems in the loan files. Bank of America disagrees that such problems exist. And even if they did exist, the bank says, they do not justify denying the claims.
The bank also says that Old Republic had ample access to Bank of America's loan books, and was able to choose which loans it wanted to insure. In letters as recent as December 2006, the suit alleges, Old Republic told Bank of America that it had reviewed the bank's insured loans and "felt that the underwriting was satisfactory" and said it was "pleased with the results."
Old Republic also asserts that it can deny claims based on missing documents in loan policies, according to the bank's lawsuit. Bank of America says that any missing paperwork has "nothing to do with the loss in question" and says that its claims are valid as long as it has "substantially complied with the requirements of the policy."
Regulators and lawyers across the country are now wrangling with banks over similar paperwork issues related to foreclosing on customers.
Hunter, the Charlotte attorney, said that insurance companies are "not in the business of paying claims, they're in the business of making a profit."
"If (Old Republic) can skate on paying the claim because there's some glitch in the paperwork, they're going to," Hunter said. "Even if it's a technicality, they're going to stand on that until a judge tells them not to."
Old Republic lost $39 million in the third quarter, compared to earning about $7 million in the same period a year before, as it dealt with more claims from the general insurance and mortgage guaranty units.
Bank of America has asked for a jury trial. The case has been assigned to Judge Graham Mullen.