Regulators take aim at force-placed insurance

Government regulators are seeking to limit fees and commissions associated with the practice, which critics say is often abused.

Federal regulators are poised to crack down on so-called force-placed property insurance amid growing concern about abusive practices that have cost homeowners.

The Federal Housing Finance Agency (FHFA) on Tuesday published two proposed guidelines that would ban many fees and commissions associated with the specialized homeowners insurance, and invited public and industry input over the next 60 days.

The agency oversees the government-owned mortgage finance giants Fannie Mae and Freddie Mac, and its final decision would affect all the mortgages guaranteed or backed by them.

The proposals, if they took effect, could cut premiums on the policies by 20 percent, said one insurance expert. Others said it’s too soon to gauge the impact.

Homeowners with mortgages are required to have insurance on their property. When they don’t, if they fail to pay a premium on their homeowners insurance, for instance, a bank, lender or mortgage servicer can buy the insurance and put it on the homeowner’s property.

There have been widespread calls for reform of the industry, which consumer advocates say is rife with troubling relationships, conflicts of interest and fees between banks and insurance companies that have contributed to unfairly high premiums for homeowners.

The FHFA on Tuesday proposed prohibiting the practice of paying commissions to insurance agents or brokers affiliated with the banks, and banning certain reinsurance arrangements.

The move follows a major settlement last week between the state of New York and New York-based Assurant Inc., one of the country’s largest providers of force-placed insurance, in which Assurant is paying a $14 million civil penalty and restitution to homeowners.

The settlement capped an investigation by the New York Department of Financial Services that found that homeowners with force-placed insurance can pay premiums up to 10 times higher than premiums for regular insurance, despite getting less protection.

“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,” Gov. Andrew Cuomo said Tuesday in a statement.

Kevin McKechnie, senior vice president and director of the American Bankers Association’s Office of Insurance Advocacy, said he expects a wide range of input during the comment period. The proposed rules would affect nearly all of the country’s 1,200 mortgage servicers, including big banks such as Wells Fargo & Co., he said, but he said he doesn’t yet know how.

“It’s a little premature for us to comment decisively yet,” McKechnie said. “We’re finally on the right path. ”

McKechnie estimated that about 1.5 to 2 percent of all existing mortgages have force-placed insurance.

J. Robert Hunter, director of insurance for the Consumer Federation of America, called the FHFA’s proposal “very positive and strong.”

“This should cut premiums by 20 percent or so,” Hunter said in an e-mail.

Hunter said the FHFA is also doing a broader review of industry practices that could result in more proposal regulations.

In Minnesota, the state Department of Commerce, which regulates insurers, is also delving into the issues and is examining the rates consumers are being charged for force-placed insurance.

 

Jennifer Bjorhus • 612-673-4683

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