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 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

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

Role of Mortgage Fraud

The Mortgage Meltdown

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

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

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

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

Mortgage Loan Applications

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

Bad Lending Practices?

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?

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

Cause and Effect RBC Mortgage Company v. National Union Fire Ins Co of Pittsburg, PA., 812 N.E. 2 nd 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.

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 sued Tri City that ‘losses’ resulted.”

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

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

Pre-existing Losses

Madoff Cases by Type

Stanford International Cases by Type

Potential Insurance Coverage

Fraud Enabled by the Crisis and New Technologies

Impact on the Fidelity Market

Financial Institution Fidelity Limits

Questions & Answers

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