Federal Action on Forced-Place Insurance Could Pressure Profits for Major Players

Federal regulators Thursday moved to tighten the regulations governing the small but highly profitable forced-place homeowners insurance market—and more is on the way.

Consumer advocates say the new initiatives give them hope that creation of the new Consumer Financial Protection Bureau through the Dodd-Frank Act will lead to lower rates in other highly profitable niche markets.

There is some disagreement among financial-services companies as to whether the new regulations exceed the mandate provided through DFA. Officials of Assurant, the largest player in forced-place insurance, says it will comply with the new regulations, while an official of a group representing the banking industry says the regulations exceed the law's mandate.

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

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

Robert Byrd, senior director, communications for Assurant Specialty Property, based in Atlanta, says, “The CFPB's provisions concerning lender-placed insurance appear largely to follow the language in the DFA and the disciplined processes Assurant follows for its clients to make sure coverage is needed and homeowners are aware of any lapse in coverage before a policy is placed.”

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

But, Kevin McKechnie, senior vice president for the Office of Insurance Advocacy at the American Bankers Association, says the CFPB new regulation “clearly goes beyond what the DFA intended.”

He says the notice provisions in the DFA were meant to provide borrowers and servicers with a roadmap for avoiding foreclosure and the expense of having hazard insurance placed against their collateral.

But, he explains, “Rather than defining this as a shared responsibility between borrowers and their bank, the CFPB has chosen to issue a mandate requiring servicers to advance a borrower's homeowners-insurance premium. This prohibits servicers from force placing coverage as long as the servicer can continue the borrower's insurance policy.”

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

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

Fannie Mae Rule Could Further Pressure Profits

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

Fannie Mae wants to line up a consortium of property insurers to write the business at a 30 to 40 percent discount.

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

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

“I pray that other lines that suffer from this 'reverse competition' plague will soon follow,” he said. “These include title insurance, credit insurance and debt-cancellation products.”

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

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

Hunter says Fannie Mae is pushing the plan because, in a foreclosure, Fannie Mae must pay any unpaid insurance bills on mortgages it insures. But he notes that the FHFA and the Federal National Mortgage Corporation “are dragging their heels, likely under pressure from banks and the forced-place insurers.

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

Fannie Mae's action, “plus pending lawsuit settlements, mean that some of the worst abuses of the forced-place insurance market are 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 captive reinsurance deals are also floundering.”