GRAHAM v. SECURITY PACIFIC HOUSING SERVICES, INC. 2
The banking industry suffered a series of devastating failures in the 1980s. One result of these failures was closer regulatory examination of the solvency of banks and the financial arrangements into which banks entered. 3 Banking regulators suggested that one practice of the banking business that contributed to the crises of the 1980s was that some banks undersecured their loans.
To head off the potential problems caused by undersecured loans, banking regulators recommended that all borrowers who secured their loans with collateral such as a car or a home carry insurance so that the loan would be safe if the collateral suffered damage or failure. Therefore, beginning in the late 1980s through the mid-1990s, new loan agreements typically required that all assets securing loans be insured. If a borrower could not qualify for the insurance or allowed an existing insurance policy to lapse, banks would obtain insurance for the borrower and include the costs of the insurance in the loan premium. This practice became known as "force-placed collateral protection insurance" (CPI). Borrowers with CPI loans paid the insurance premiums as they paid down the original loan; the premiums were added to the principal, bumping up the total loan value. Either the number of installments or the size of installment payments was increased.
Borrowers soon began suing creditors, arguing that CPI contracts breached the terms of loan agreements as well as the appropriate relationship between the borrower and the creditor. Moreover, borrowers claimed banks were charging above-market premiums and commissions for the insurance and placing unnecessarily high coverages on the loans. Consequently, a family of litigation arose in many different consumer contexts -- including loans for cars, homes, construction, and other forms of consumer credit -- targeting not only regional and national banks but consumer credit firms and other lending companies as well. 4