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The Federal Housing Finance Agency (FHFA) is considering suing banks and other mortgage servicers for over-charging Fannie Mae (FNMA) and Freddie Mac (FMCC) on force-placed insurance. Per the report of the FHFA’s Office of Inspector General, the excessive fees had subsequently resulted in extra charges of nearly $158 million in 2012 alone.

Further, several lawsuits along with the investigations carried out by the New York's Department of Financial Services in 2012, surfaced the fact that major banks had colluded with insurers to raise the prices of force-placed insurance. The gain from the inflated price was then shared between the two.

The probes also revealed that the banks including JPMorgan Chase & Co. (JPM - Analyst Report), Wells Fargo & Company (WFC - Analyst Report) and Citigroup Inc. (C - Analyst Report) set up separate insurance agencies to accept commissions from the two main insurers, Assurant Inc. (AIZ - Analyst Report) and QBE Holdings, a unit of Australian insurer QBE Insurance Group Ltd.

Nevertheless, the FHFA will decide about the filing of lawsuits within the next 12 months. In case the regulatory body decides to press charges, the chances of winning are high.

Over the last few years, many class-action lawsuits with similar charges have been settled by several banks including Bank of America Corporation (BAC - Analyst Report), JPMorgan, Wells Fargo and HSBC Holdings plc (HSBC - Analyst Report). These settlements have enabled a recoup of approximately $674 million.

Although force-placed insurance has been banned by the FHFA since June this year, we believe that allegations similar to the one mentioned above will likely continue cropping up. However, in the event of long-drawn legal procedures, it would not be worthwhile for the FHFA to file lawsuits against the banks.

Though the names of the faulty financial institutions have not been revealed, big names like the afore-mentioned ones are expected in the list. With the banks already facing considerable litigation headwinds, these lawsuits would further dent their performances.

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