Thursday, April 12, 2012

The Banking Industry Speaks Up for Force-Placed Insurance - Insurance Networking News

Insurance Networking News, April 12, 2012

Jeff Horwitz

Like many controversies, mortgage lenders' use of force-placed home insurance arose from what was once a well established and unquestioned practice. For many years, homeowners who failed to maintain property insurance could count on their banks buying it for them and passing on the cost.

It is the way that banks have been buying such insurance that's become a hot topic recently. Most of the nation's top mortgage servicers outsource their force-placed programs, yet reap commissions on the policies. Consumer advocates have alleged such arrangements amount to pay-to-play kickbacks in which insurers pay banks for access to borrowers and then stick homeowners with exorbitant premiums.

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With the scrutiny, force-placed insurance has become a focus of a slew of regulatory and legal challenges. A number of class actions have been filed against lenders. New York's Department of Financial Services launched a broad investigation, and California's insurance commissioner has demanded that insurers lower their premiums. Fannie Mae also announced plans to restrict force-placed commissions.

Banks themselves have said little publicly about their force-placed programs. Last month, however, Insurance Networking News' sister publication, American Banker, spoke with Kevin McKechnie, executive director of the American Bankers Insurance Association, about the force-placed furor, the industry's response and possible areas of compromise. Following is an excerpted version of the interview.

Are you surprised by how controversial force-placed insurance has become?

KEVIN MCKECHNIE: It's a direct result of the foreclosure wave. Not surprisingly, people are looking at the form, the corporate structure and the cost issues. But there seems to be a great deal of yeoman's work on educating the populace about how the product actually works.

There's a misunderstanding [among many people] that borrowers who have voluntary homeowners insurance in place are getting stuck with force-placed policies. But lenders … only force-place when there's no valid insurance policy in place. If you understand that, a certain amount of this starts to make sense. The key for the consumer point of view, in all circumstances that we were able to find the focus is on repairing the collateral so the homeowner can repair the home.

I've heard frequent complaints that banks allow delinquent borrowers' coverage to expire and then force-place much more expensive policies. I've found examples of such claims in Florida court records, too, and regulators are looking to put a stop to it. What's the industry's take on the proper response when a borrower stops paying an escrowed insurance policy?

We asked our membership, and servicers say that as long as there's coverage in force, even if the account has insufficient funds, they [the banks] advance the funds. You only get to force placement when there's no valid insurance contract for the servicer to pay.

So we're not concerned about the CFPB [Consumer Financial Protection Bureau] so long as it does what's in Dodd-Frank, which is what we're doing anyway.

There's been a lot of criticism that banks are actively trying to force place coverage. It doesn't work that way. We're doing something the law doesn't require by giving borrowers free loans so they can pay their homeowners insurance. That's a big deal.

If that is in fact the way most servicers are handling escrowed accounts, that would remove a highly contentious issue from debate. But if we're going to fully commit to extending voluntary policies, why not just have the servicer re-up the contract with the voluntary insurer?

This is something the country hasn't grappled with and we haven't seen talked about sufficiently in the press. No one's contacted an insurer to ask "are you willing to accept the dollars that you get when the risks are more akin to those on force placed?"

And if you look at it from the voluntary insurers' perspective, there's cause for alarm. When you get to force placement, the risks aren't known. That's why force-placed policies are generally more expensive. It's because the insurer is providing a product for continuous coverage on collateral [a home] they haven't seen to a borrower they don't know.

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