Fannie & Freddie have finally begun to investigate the self-dealing and often fraudulent practice of Force-Placed Insurance. Both the New York State Insurance Regulator and the Consumer Financial Protection Bureau have been way ahead of the GSEs on this.
For those of you who may be unfamiliar with Force-Placed Insurance, it is an optional bank insurance product that sometimes gets forcibly jammed down the throats of home owners and mortgage investors at grossly inflated prices. As Jeff Horowitz detailed in 2010 (Losses from Force-Placed Insurance Are Beginning to Rankle Investors), most of the fees, commissions and revenues from this “product” went straight back to the banks holding the related mortgage, typically to wholly owned subsidiaries.
It was an abusive practice, and in quite a few instances, the additional costs actually tipped homeowners into foreclosure.
Here’s the WSJ:
“The Federal Housing Finance Agency, which regulates mortgage giants Fannie Mae (FNMA) and Freddie Mac (FMCC) plans to file a notice Tuesday to ban lucrative fees and commissions paid by insurers to banks on so-called force-placed insurance . . .
Forced policies have boomed in the wake of the housing bust, as many homeowners struggled to keep up with mortgage payments. Some borrowers may try to save money by dropping the original standard coverage, only to be hit by policies with premiums that are typically at least twice as expensive as voluntary insurance, and sometimes cost as much as 10 times more. Nearly six million such policies have been written since 2009, insurance industry data indicate. Consumers are free at any point to replace a force-placed policy with one of their own choosing.”
The Consumer Financial Protection Bureau has issued new rules on this, but the real action seems to be the variety of civil suits from investors; additionally, New York State just reached a settlement with forced-placed insurer Assurant, including a $14 million penalty, and a long list of practice changes (after the jump). If it were up to me, I would have insisted on profit disgorgement and jail time for the CEO (But I am “unreasonable”).
Hopefully, this is the first of many . . .
Latest Mortgage Scandal: Force-Placed Insurance (November 10th, 2010)
Rule of Law: Banker Criminality Demands Prosecution (May 20th, 2011)
A modern Pecora Commission could right Wall Street wrongs (February 5th, 2012)
U.S. Cracks Down on ‘Forced’ Insurance
ALAN ZIBEL And LESLIE SCISM
WSJ, March 25, 2013
Losses from Force-Placed Insurance Are Beginning to Rankle Investors
Amaerican Banker, NOV 9, 2010
The key terms of the settlement include:
► Assurant shall file with DFS a premium rate with a permissible loss ratio of 62 percent, supported by the required data and actuarial analysis that is acceptable both professionally and to DFS. This will substantially reduce homeowners’ premiums.
► Every three years, Assurant will be required to re-file its rates with DFS for review.
► If Assurant’s actual rates in any year result in an actual loss ratio of less than 40 percent for the immediately preceding calendar year, Assurant will be required to re-file its rates for the next year for DFS review in order to bring the loss ratio back up.
► Assurant must report annually to DFS on its actual loss ratio, earned premiums, itemized expenses, losses, and reserves.
To put a stop to the improper and unfair practices found in DFS’s investigation, many of which helped Assurant support inflated premiums:
► Assurant shall not issue force-placed insurance on mortgaged property serviced by a bank or servicer affiliated with Assurant.
► Assurant shall not pay commissions to a bank or servicer or a person or entity affiliated with a bank or servicer on force-placed insurance policies obtained by the servicer.
► Assurant shall not reinsure force-placed insurance policies with a person or entity affiliated with the servicer that obtained the policies.
► Assurant shall not pay contingent commissions based on underwriting profitability or loss ratios.
► Assurant shall not provide free or below-cost, outsourced services to servicers or their affiliates.
► Assurant shall not make any payments, including but not limited to the payment of expenses, to servicers, lenders, or their affiliates in connection with securing business.
To provide restitution to those who were harmed by Assurant’s practices:
► Refunds will be provided to consumers through a claims process and a third-party administrator selected by DFS and paid for by Assurant for homeowners who have been force-placed at any time after January 1, 2008 and meet the eligibility criteria for one of the following three categories of claimants:
► Homeowners who defaulted on their mortgage or were foreclosed because of force placement.
► Homeowners who were charged for force placement at a coverage limit higher than permitted by their mortgage.
► Homeowner’s who were erroneously charged for force-placed insurance: either because they had voluntary insurance in effect, or they were charged commercial rates for a residence.