New York Gov. Andrew M. Cuomo announced that his administration is proposing a groundbreaking set of new rules to reform the force-placed insurance industry. The Department of Financial Services (DFS) regulations will help protect homeowners from abuse; eliminate kickbacks in the industry that drove up premiums; and save homeowners, taxpayers and investors millions of dollars going forward through lower rates.
After conducting an extensive investigation, DFS reached agreements earlier this year with the major force-placed insurers doing business in New York—including Assurant, QBE, and other companies—to implement reforms and deliver restitution to homeowners who were harmed. These new DFS regulations will help ensure that these reforms will apply to the industry moving ahead—even if new insurers enter this market.
“Two years ago, my administration launched an investigation of the force-placed insurance industry that revealed widespread abuses of consumers by banks and mortgage companies,” Governor Cuomo said. “Today, we are taking a major step in righting this injustice and reforming the industry by proposing tough new regulations to protect homeowners. Insurers should be on notice that New York State is going to continue rooting out abuse in the industry and protecting taxpayers.”
Benjamin M. Lawsky, Superintendent of Financial Services said, “Our investigation uncovered a kickback culture in this industry that inflated premiums and did serious damage to struggling homeowners. These new rules will help ensure that homeowners remain protected and force-placed insurers don’t simply slide back to the bad old practices of the past.”
In October 2011, DFS launched an investigation into the force-placed insurance industry. Force-placed insurance is insurance taken out by a bank, lender, or mortgage servicer when a borrower does not maintain the insurance required by the terms of the mortgage. This can occur if the homeowner allows their policy to lapse (often due to financial hardship), if the bank or mortgage servicer determines that the borrower does not have a sufficient amount of coverage, or if the homeowner is force-placed erroneously.
DFS’s investigation revealed that the premiums charged to homeowners for force-placed insurance can be two to 10 times higher than premiums for voluntary insurance—despite the fact that force-placed insurance provides far less protection for homeowners than voluntary insurance. Indeed, even though banks and servicers are the ones who choose which force-placed insurance policy to purchase, the high premiums are ultimately charged to homeowners, and, in the event of foreclosure, the costs are passed onto investors. And when the mortgage is owned or backed by a government-sponsored enterprise, such as Fannie Mae or Freddie Mac, those costs are ultimately borne by taxpayers.
DFS’s investigation revealed that certain force-placed insurers competed for business from the banks and mortgage servicers through what is known as “reverse competition.” That is, rather than competing by offering lower prices, the insurers competed by offering what is effectively a share in the profits. This profit sharing pushed up the price of force-placed insurance by creating incentives for banks and mortgage servicers to buy force-placed insurance with high premiums. That is because the higher the premiums, the more that the insurers paid to the banks. This troubling web of kick-backs and payoffs at certain force-placed insurers helped push premiums sky-high for many homeowners.
New York’s nation-leading force-placed insurance reforms in the proposed rules include the following requirements to help eliminate the kickback culture that pervaded this industry and lower premium rates:
►Force-placed insurers shall not issue force-placed insurance on mortgaged property serviced by a bank or servicer affiliated with the insurers.
►Force-placed insurers shall not pay commissions to a bank or servicer or a person or entity affiliated with a bank or servicer on force-placed insurance policies obtained by the servicer.
►Force-placed insurers shall not reinsure force-placed insurance policies with a person or entity affiliated with the banks or servicer that obtained the policies.
►Force-placed insurers shall not pay contingent commissions based on underwriting profitability or loss ratios.
►Force-placed insurers shall not provide free or below-cost, outsourced services to banks, servicers or their affiliates.
►Force-placed insurers shall not make any payments, including but not limited to the payment of expenses, to servicers, lenders, or their affiliates in connection with securing business.
►Force-placed insurers must provide adequate notification requirements to ensure homeowners understand their responsibility to maintain homeowners insurance, and that they may purchase voluntary homeowners insurance coverage at any time.
►Force-placed insurers must not exceed the maximum amount of force-placed insurance coverage on New York properties.
►Force-placed insurers or affiliates must refund all force-placed insurance premiums for any period when there is overlapping voluntary insurance coverage;
►Force-placed insurers are required to regularly inform the Department of loss ratios actually experienced and re-file rates when actual loss ratios are below 40 percent – helping make sure that premiums are not inflated.