The state of New York is cracking down on lenders who charge from two to ten times the going rate for “force-placed” homeowners insurance. Under new rules such alleged price gauging, kick-backs and “reverse competition” are out, at least in the Empire State.
But while New York moves ahead to end a legalized scam with mark-ups of as much as 1,000 percent, lawmakers in other states are doing nothing to curb homeowners insurance abuse. Also unprotected are taxpayers, meaning that if a property with a federally-insured loan is lost it is taxpayers who will foot the bill for any losses.
Force-Placed Homeowners Insurance
What is force-placed homeowners insurance and how does it work?
When you get a mortgage there is a requirement to pay property taxes and homeowners insurance. These requirements make perfect sense because if taxes are unpaid the property can be sold at public auction by the local government. As to homeowners insurance, that’s necessary because the property and it’s “improvements” — the house and any other structures on the property — are security for the loan. To assure that the value of the security is not lost to fire or other hazards lenders require that owners maintain adequate levels of homeowners insurance.
“Force-placed insurance,” says New York’s Department of Financial Services, “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.”
Well, so what. If the homeowner does not carry insurance then surely the lender should be allowed to step-in and get the required insurance — with the bill going to the property owner.
That would be fine if lenders charged reasonable fees. However, according to New York, “the premiums charged to homeowners for force-placed insurance can be two to ten 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.”
And it gets worse:
“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.”
Here’s what the New York rules will do when they become effective:
___ Force-placed insurers will not issue force-placed insurance on mortgaged property serviced by a bank or servicer affiliated with the insurers.
___ Force-placed insurers will 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 will not reinsure force-placed insurance policies with a person or entity affiliated with the banks or servicer that obtained the policies.
___ Force-placed insurers will not pay contingent commissions based on underwriting profitability or loss ratios.
___ Force-placed insurers will not provide free or below-cost, outsourced services to banks, servicers or their affiliates.
___ Force-placed insurers will 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 will be 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.
With any luck — and despite cries of outrage and “over-regulation” — the New York decision will spread to other insurance regulators nationwide.