Recent news regarding lender-placed insurance (more colloquially known as “force-placed” insurance) has focused on state efforts to regulate the industry. Now the Feds are getting involved, specifically the Federal Housing Finance Agency (FHFA). FHFA is now prohibiting servicers of mortgages issued by Fannie Mae and Freddie Mac from receiving any compensation from those insurers providing the force-placed coverage. Fannie Mae and Freddie Mac write over 60 percent of all mortgages in the U.S. As such, this action is going to impact a large segment of the industry.
Force-placed coverage is coverage that mortgage holders force on mortgagees if, say, the insurance policy covering the collateral lapses. This ensures that the collateral, e.g. the house, is sufficiently covered. This coverage is primarily associated with home mortgages. The rates charged for such policies can be considerably higher than a normal insurance policy. Regulators suspect that at least some of that cost is due to incentives/compensation that insurance companies provide the mortgage holder for taking out the force-placed policy with that insurer.
Among the most vocal of critics of this practice include the insurance regulators from New York, California, and Florida. New York recently issued a circular letter prohibiting insurance agents from providing insurance tracking services to mortgage providers at no or significantly reduced cost in an effort to attract future force-placed business.
FHFA’s actions also adds another potential de facto insurance regulator to a growing field. Insurance is traditionally regulated at the state level. However, since 2010, several federal entities have entered the field. The Federal Insurance Office (FIO), while not a regulator, sits on the International Association of Insurance Supervisors (IAIS) and is conducting studies on the current state of insurance regulation. The Federal Reserve Bank sits on the Financial Stability Oversight Council (FSOC) which recently designated AIG and Prudential as Systemically Important Financial Institutions (SIFI) and recently requested a seat on the IAIS.