FHFA Wades into Force-Placed Issue with Proposed Regulation

Force-placed insurance underwriters would be barred from paying fees and commissions to banks who own or service home mortgages that are either delinquent or in foreclosure under a rule proposed by the regulator of Freddie Mac and Fannie Mae.

Technically, the proposed action by the Federal Housing Finance Agency would bar the government-sponsored enterprises (GSE) from paying commissions to the banks that service troubled mortgages that the GSEs guarantee.

Force-placed homeowners insurance is projected to bring in $2.6 billion in written premiums annually.

The proposed notice of FHFA’s action is being published today in the Federal Register. FHFA is giving interested parties 60 days to comment, and sometime after that period it will issue a final policy for Fannie and Freddie to follow.

Robert Hunter, director of insurance for the Consumer Federation of America, says, “CFA applauds FHFA's strong action to protect consumers and taxpayers from some of the excesses of force-placed insurance.

“Sweetheart commission and reinsurance arrangements will soon end and will only be a distant nightmare for those borrowers once forced to eat these excessive costs.”

Kevin McKechnie, senior vice president and director of the American Bankers Association’s Office of Insurance Advocacy, says, “We support an open process that invites comment from all stakeholders, especially state insurance regulators, state legislators, consumers and insurance and servicer partners.”

McKechnie adds, though, “We remain concerned that FHFA's broad reform proposal may limit the ability of smaller servicers to continue meeting their customers’ insurance needs.”

But he says, “We will continue to work with regulators to deliver collateral insurance in the best way possible.”

The FHFA action follows a disclosure last week by New York that it had reached an agreement with Assurant, Inc. on a program that would reform Assurant’s forced-place lender program.

In its settlement with New York, Assurant agreed to maintain its loss ratio at 62 percent or more, with three-year reviews of rate filings to get it there if losses are less. They will be required to adjust rates immediately if the loss ratio falls below 40 percent.

Additionally, Assurant agreed to pay $14 million to the state to settle claims of overpayments by homeowners and others, including Fannie and Freddie, for force-placed insurance provided by Assurant.

It also agreed to refund payments to customers who feel they have been charged in error for lender-placed insurance.

Assurant spokesman Robert Byrd, based in Atlanta, says Assurant has agreed to participate in that program, “as it has always been our policy to issue refunds in the event a policyholder was somehow charged erroneously.”

That settlement was based on a probe by the New York Department of Financial Services that last year found that nearly 15 percent of the premiums from force-placed policies flow back to the banks.

The DFS probe found that banks' commissions on the force-placed policies frequently top more than 10 percent of the homeowners annual premiums of about $2,000, according to regulators.

In response to the FHFA action, Robert Byrd, a spokesman for Assurant, says, “We've worked with Fannie and Freddie for years and look forward to working with them and the FHFA as they develop their insurance programs.”

Byrd says, “We are confident we offer the expertise, capabilities and flexibility to provide effective solutions to protect GSEs, lenders and homeowners alike.

“We already work with a number of insurance affiliates who waive commissions, and others who do not. We can work with either approach.”

Cuomo also issued a statement in response to DeMarco’s actions.

"New York's reforms and the findings of the extensive investigation by the Department of Financial Services continue to serve as a national model and FHFA's new proposal appears to be another step in that direction," Cuomo says.

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