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In an insurance fraud brochure published by the FBI, fee churning was described as follows:

"In Fee Churning, a series of intermediaries take commissions through reinsurance agreements. The initial premium is reduced by repeated commissions until there is no longer money to pay claims. The company left to pay the claims is often a business the conspirators have set up to fail. When viewed alone, each transaction appears to be legitimate-only after the cumulative effect is considered does fraud emerge."

The brochure also states that "The insurance industry consists of more than 7,000 companies that collect over $1 trillion in premiums each year. The massive size of the industry contributes significantly to the cost of Insurance Fraud by providing more opportunities and bigger incentives for committing illegal activities."

As you know, AIG played a dubious role in the sub-prime mortgage crisis by setting up a company division which could operate to insure the risky sub-prime mortgage portfolios against loss; all in apparent circumvention of applicable insurance regulations. That single division would end up taking down AIG.

However, don't think for a second that AIG's collapse hurt the crowd of "fee churning sharks" that made their living off the fees from questionably legal sub-prime mortgage derivatives.

Still hungry, that same group of fee-churning sharks is zeroing in on the U.S. mortgage crisis as a means of skillfully churning unmerciful fees (acceleration fees, legal fees, forbearance fees, broker fees, auction fees, and a host of other fees) at the demise of property owners, both residential and commercial, as short sales and foreclosure sales are feeding yet another fee-churning extravaganza.

Getting the picture?

- Ed Smith, Publisher
The EHS Letter Manual