Discovery in foreclosure cases: Who has cyber insurance?

You might have to fight for it, but if you ask nicely, firmly and persistently this one question might lay bare the realities of the whole “who’s on first?” routine of Abbott and Costello, as adapted by Wall Street investment banks.

Cyber insurance is a specific type of insurance that guards against losses or claims arising out of hacks or breaches of computer security. Anyone in banking, lending, servicing or finance maintaining original secure data would be required by other vendors and customers to have cyber insurance, because no system is 100% secure.

A recent birdie came to visit me in a dream. She told me that ONLY the party responsible for the secure server would be able to qualify for that insurance although others could be third party beneficiaries.

She also said that in most cases the insured is Black Knight — not Ocwen, Bayview, SPS, SLS, or any other name you might have heard used or represented as servicer. And she said that there is another insurance policy that covers the lock box operated by Black Knight which specifically identifies borrower payments.

In my dream, she thought I might be interested. I am.

If the “servicer” whom we all love to hate is not actually receiving payments from borrowers and some third party vendor is in total control of those payments, then a few things are true.

1. The named servicer is not employing anyone who is making entries on the books and records at or near the time of a transaction.
2. The named servicer (Ocwen for example) is merely witness to entries made by people and technology operated, owned, controlled and maintained by a third party (Black Knight fka Lender Processing Systems for example).
3. The named servicer would therefore have no knowledge or control over who received money from borrower payments after they were received under the lockbox contract. This means that servicer records and testimony about boarding loans when “servicers” are changed are pure fiction.
4. Records from such a named servicer would therefore be inadmissible as hearsay on hearsay and lacking in legal foundation and competence.
5. If the named servicer does not carry Cyber insurance then it has no data to insure. Ordinarily you must have an insurable interest in order to be the insured under any insurance policy.
6. If a third party vendor has the cyber insurance then that is the real servicer — who is most likely functioning under contract with one or more investment banks.
7. If the named servicer does not carry lock box insurance, then it has no receipts to protect. Ordinarily you must have an insurable interest in order to be the insured under any insurance policy.
8. If a third party vendor has the lockbox insurance then that who is receiving payments. And only their records are admissible in evidence as proof of payment history.
9. If the named servicer is only claiming to represent a REMIC trust and the actuals service is working for the investment bank, this creates an obvious inference that the real party in interest in the litigation is the investment bank and into the trust.
10. If the trustee named in the REMIC trust does not maintain insurance that covers losses from mishandling funds for investors, then the trustee is not handling funds for investors.
11. If the trustee is not handling funds for investors then neither is the trust who can only act through the trustee.

So the questions in discovery would be directed the existence of insurance, the name of the insured or beneficiary, and the subject matter insured.

*Neil F Garfield, MBA, JD, 73, is a Florida licensed trial attorney since 1977. He has received multiple academic and achievement awards in business and law. He is a former investment banker, securities broker, securities analyst, and financial analyst.*

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