Federal regulators Thursday moved to tighten the regulationsgoverning the small but highly profitable forced-place homeownersinsurance market—and more is on the way.

Consumer advocates say the new initiatives give them hope thatcreation of the new Consumer Financial Protection Bureau throughthe Dodd-Frank Act will lead to lower rates in other highlyprofitable niche markets.

There is some disagreement among financial-services companies asto whether the new regulations exceed the mandate provided throughDFA. Officials of Assurant, the largest player in forced-placeinsurance, says it will comply with the new regulations, while anofficial of a group representing the banking industry says theregulations exceed the law's mandate.

Under the rules promulgated by the CFPB Thursday, mortgageservicers' ability to impose forced-place coverage on an insuredwill be limited. Servicers will need to have a “reasonable basis”to prove that the borrower lacks necessary insurance beforepurchasing a new insurance policy.

If that “reasonable basis” is not provided then the servicerwill have to terminate the new policy within 15 days and refund theinsurance premium, CFBP director Richard Cordray said.

Robert Byrd, senior director, communications for AssurantSpecialty Property, based in Atlanta, says, “The CFPB's provisionsconcerning lender-placed insurance appear largely to follow thelanguage in the DFA and the disciplined processes Assurant followsfor its clients to make sure coverage is needed and homeowners areaware of any lapse in coverage before a policy is placed.”

He adds, “Lender-placed insurance is an important safety net inthe mortgage system. We communicate extensively with homeowners tomake sure they are aware of any lapse in coverage, and know theiroptions for protecting their home.”

But, Kevin McKechnie, senior vice president for the Office ofInsurance Advocacy at the American Bankers Association, says theCFPB new regulation “clearly goes beyond what the DFAintended.”

He says the notice provisions in the DFA were meant to provideborrowers and servicers with a roadmap for avoiding foreclosure andthe expense of having hazard insurance placed against theircollateral.

But, he explains, “Rather than defining this as a sharedresponsibility between borrowers and their bank, the CFPB haschosen to issue a mandate requiring servicers to advance aborrower's homeowners-insurance premium. This prohibits servicersfrom force placing coverage as long as the servicer can continuethe borrower's insurance policy.”

McKechnie says this requirement isn't in the DFA and could bringunintended market consequences that will harm consumers.

“The rule was meant to provide help to borrowers experiencinghardship during the economic crisis, but instead it risks imposinggreater borrowing costs on all mortgagors in the future. ABIA urgesthe CFPB to reconsider their rule,” McKechnie says.

Fannie Mae Rule Could Further PressureProfits

John Nadel, an insurance analyst at Sterne Agee & Leach inNew York says forced-place insurers could feel a greater squeezefrom a new initiative by the Federal National Mortgage Association.Fannie Mae wants its regulator to approve a process that wouldencourage more insurance entrants into the forced-place market.

Fannie Mae wants to line up a consortium ofproperty insurers to write the business at a 30 to 40 percentdiscount.

Nadel discounts that estimate. “…assuming losses from SuperstormSandy are somewhat material, it's reasonable to assume this couldhave some impact on new entrants' willingness to take on thebusiness at such a deep discount—time will tell on that front.”

Robert Hunter, director of insurance for the Consumer Federationof America, sees a broad potential impact from the CFPB.

“I pray that other lines that suffer from this 'reversecompetition' plague will soon follow,” he said. “These includetitle insurance, credit insurance and debt-cancellationproducts.”

The industry had anticipated new regulations tighteningmortgage-servicing rules, which analysts project will cut profitsby one-third by the two major players, Assurant and QBE.

The Fannie Mae plan is awaiting approval by its regulator, theFederal Housing Finance Agency.

Hunter says Fannie Mae is pushing the plan because, in aforeclosure, Fannie Mae must pay any unpaid insurance bills onmortgages it insures. But he notes that the FHFA and the FederalNational Mortgage Corporation “are dragging their heels, likelyunder pressure from banks and the forced-place insurers.

“So, while it helps consumers, that is not the motivation forFannie Mae,” Hunter says. “Consumers would be 'collateral damage'for QBE and Assurant,” he adds.

Fannie Mae's action, “plus pending lawsuit settlements, meanthat some of the worst abuses of the forced-place insurance marketare nearing an end,” Hunter continues.

“Under the pressure, banks are dropping commission deals like'too-hot hotcakes,' for instance,” he says. “ Other kickbacks,like below-cost-tracking services and sweetheart captivereinsurance deals are also floundering.”