That practice, known as force-placed or lender-placed insurance, has recently attracted the attention of federal and state regulators, who say that the policies often have premiums that are considerably higher than the policies they replace and might impose abusive costs on homeowners.
The Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, the country’s two biggest mortgage guarantors, on Tuesday proposed a new rule that would prohibit insurance companies from paying sales commissions for force-placed insurance to lenders or mortgage servicers.
After a 60-day comment period, the agency will possibly revise its proposal, which will be issued before the end of the year, according to an agency notice.
“In the wake of the financial crisis, demands for lender-placed insurance have risen,” the agency said. As a result, so have expenses for Fannie Mae and Freddie Mac.
Several regulators, including the National Association of Insurance Commissioners, the Consumer Financial Protection Bureau and state attorneys general, have expressed concerns about “excessive rates and costs passed onto borrowers, as well as commissions and other compensation paid to servicers by carriers,” the federal agency said.
Last week, Gov. Andrew M. Cuomo of New York announced a $14 million settlement with Assurant, one of the largest providers of force-placed insurance. The settlement included several provisions that prohibit some commissions and expenses.
The settlement also required the company to file its rates with the state and allows New York insurance regulators to monitor Assurant’s practices.
“Our investigation found that insurers and banks built a network of troubling relationships and payoffs that helped drive premiums sky-high,” said Benjamin M. Lawsky, New York’s top financial regulator. “Those improper practices created significant conflicts of interest and saddled homeowners, taxpayers and investors with millions of dollars in unfair and unnecessary costs.”
The housing finance authority said that premiums for force-placed insurance were generally double or more the cost of insurance bought directly by a homeowner. Fannie Mae and Freddie Mac are affected, the agency said, when a bank or servicer pays the higher premiums and later, unable to recapture the cost from the homeowner, passes the expense along to the companies.
Article source: http://www.nytimes.com/2013/03/27/business/economy/regulators-review-costs-of-force-placed-insurance.html?partner=rss&emc=rss