The Credit Crunch: The Credit Crunch: What’s Crime Got What’s Crime Got

to Do With It?to Do With It?

Singin’ The PL BluesSingin’ 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

AgendaAgenda

• 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 FraudRole of Mortgage Fraud

The Mortgage MeltdownThe 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 ApplicationsMortgage Loan Applications

Fraud/Forgery Covered Under a Fraud/Forgery Covered Under a Financial Institution Bond?Financial Institution Bond?

Or….????

Bad Lending Practices?Bad Lending Practices?

Loan ApplicationLoan 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 Mortgage Loan Purchase and Sale AgreementsSale 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 EffectCause 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.

Cause and EffectCause 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.”

Cause and EffectCause 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….”

Cause and EffectCause and Effect

• Vons Companies v. Federal Insurance Co, 212 F.3d 489 (9th Cir. 2000)

“Direct means direct…”

Pre-existing LossesPre-existing Losses

Madoff Cases by TypeMadoff Cases by Type

5%

5%

3%

9%

3% 4%

19%6%

8%

16%

18%

10%

Malpractice: Banking

Malpractice: Auditing

Malpractice: Fund Manager

Malpractice: Investment Advisor

Securities: Breach of Fiduciary Duties

Securities: Collective Action

Securities: Fraud

Securities: Class Action

Securities: Derivative Action

Insurance Coverage Disputes

Ponzi Scheme

Other

Stanford International Cases by TypeStanford International Cases by Type

29%

26%13%

8%

16%

8%

Securities: Class Action

Securities: Fraud

Securities: Sales Practices

Fraudulent Trade Practices

Malpractice

Other

Potential Insurance CoveragePotential Insurance Coverage

Fraud Enabled by the CrisisFraud Enabled by the Crisisand New Technologiesand New Technologies

Impact on the Fidelity MarketImpact on the Fidelity Market

Financial Institution Fidelity LimitsFinancial Institution Fidelity Limits

QuestionsQuestions&&

AnswersAnswers

Many thanks to …Many thanks to …

• Edward Gallagher

• Christopher Cavallaro

• Phyllis Chechile

• David DiBiase

• Melissa Mailman Schwartz

• John Wallace