Bank of America Sues First American on ‘Lien Protection’ Claims

Bank of America Sues First American on ‘Lien Protection’ Claims

Bank of America Sues First American on ‘Lien Protection’ Claims

Is this the first of many to come?
Bank of America Sues First American on ‘Lien Protection’ Claims

March 18, 2010, 10:46 AM EDT

By David Mildenberg

March 18 (Bloomberg) — Bank of America Corp. stepped up efforts to curtail the cost of soured mortgages by suing First American Corp., claiming the title insurer refused to cover more than 5,500 loans that caused $535 million of losses.

First American, the second-biggest title insurer, was supposed to protect the bank against defective titles on home- equity loans and lines of credit, according to the suit, filed March 5 in a North Carolina court. The suit focuses on loans in which Bank of America relied on a borrower’s word regarding any outstanding liens or mortgages, the suit said.

Home lenders are sparring with mortgage insurers, bond investors and Fannie Mae and Freddie Mac over who should bear the cost of record defaults. Bank of America, the biggest U.S. lender by assets, said last week it’s writing off $1.5 billion to $2 billion of unpaid home-equity loans each quarter, and has sued MGIC Investment Corp., the biggest mortgage insurer, for allegedly denying millions of dollars of claims.

The policies described in the First American case sound like “liar’s title insurance,” similar to the “liar loans” common among subprime lenders in the middle of the last decade, said Jack M. Guttentag, chairman of GHR Systems, a consulting firm in Wayne, Pennsylvania. Liar loans are industry slang for mortgages made to borrowers who inflated their income on applications that weren’t verified by lenders.

Lenders such as Charlotte, North Carolina-based Bank of America bought “lien protection” plans as a faster, cheaper approach for home-equity loans than full title insurance policies as housing sales soared in the mid-2000s. Full title insurance typically involves an independent check by the insurer on whether the title might face competing claims for ownership or financial obligations.

2,000 Letters

The American Land Title Association, a trade group representing title insurers, opposed some of the lien-protection plans because they offered less legal protection than traditional title insurance.

First American denied or ignored most of Bank of America’s claims in 2008 and 2009, according to the lawsuit. Last August, Santa Ana, California-based First American started sending more than 2,000 letters to the bank seeking information and documents related to the claims, the suit said.

First American subsidiaries “regret that their valuable customer, Bank of America, has chosen to file a legal action against the companies,” spokeswoman Carrie Gaska said in an e-mailed statement. “We are hopeful that we will be able to resolve this matter outside of court with continued discussions.”

The suit was filed in Mecklenburg County Superior Court in Charlotte. Bank of America spokeswoman Shirley Norton had no comment.

MGIC has said it will defend itself against Bank of America’s lawsuit, which was filed by the lender’s Countrywide unit. Bank of America ranked second last year in home mortgage lending behind Wells Fargo & Co.

–With assistance from John Gittelsohn in New York. Editors: William Ahearn, Rick Green

To contact the reporter on this story: David Mildenberg in Charlotte at dmildenberg@bloomberg.net

To contact the editor responsible for this story: Alec McCabe in New York at amccabe@bloomberg.net

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