Few of the restrictions in the proposed attorneys generals' settlement of mortgage servicing practices are as absolute as the prohibition of profiting from force-placed insurance.
Under the settlement's terms, banks and other mortgage servicers are forbidden from placing policies with an affiliate or accepting "commissions," "referral fees," "kickbacks" or "anything of value" in relation to force-placed policies. Moreover, it would require servicers to attempt to maintain delinquent borrowers' existing policies, rather than replacing them with more expensive ones.
The Mortgage Bankers Association and the four largest servicers either declined to speak with American Banker for this article or did not return phone calls. But investor and borrower advocates said that, if the provisions in the attorneys general settlement survive, they would upend a basic component of the servicing business.
Though banks do not report how much they collect from such payments, a cursory review of force-placed insurers' financials suggests that the business brings servicers hundreds of millions of dollars every year. Combined with the servicing settlement's more general restrictions on marking up default- and foreclosure-related services, the proposal threatens a high-margin source of servicing income.
"This overturns long-standing industry practice," said Diane Thompson, of counsel for the National Consumer Law Center. "I think the [banking] industry will fight as hard as it can against oversight and enforceability on this."
Historically an overlooked niche in the mortgage servicing industry, force-placed insurance has become both prevalent and controversial because of the unprecedented stress homeowners faced after the housing collapse. Banks purchase force-placed policies when mortgage borrowers don't live up to their obligation to maintain insurance on their property. Homeowners then must pay back the servicer for the premiums it advanced the insurer, often at multiples of what a voluntarily purchased policy would run.
Though part of the extra expense can be explained by the higher risks associated with insuring the homes of delinquent borrowers, force-placed policies generate profit margins unheard of elsewhere in the insurance industry — even after accounting for the generous commissions and other payments that servicers demand. Force-placed policies are reviled by consumer advocates for pushing already-struggling borrowers toward foreclosure, and their costs have also drawn criticism from mortgage investors who end up paying for them when borrowers default.
Despite those complaints, servicers have maintained that there is nothing wrong with receiving commissions and other profit-sharing incentives from their insurer partners. Bank-insurer relationships have sparked isolated litigation, but until the attorneys generals' effort there had been few signs that government officials were scrutinizing those cross-industry ties.
"Generally, we have concerns about consumers being compelled to pay substantially overpriced insurance premiums, particularly in cases where consumers are already under financial stress," said Geoff Greenwood, a spokesman for Iowa Attorney General Tom Miller, who is leading the 50-state effort. "The force-placed insurance issue is one of many concerns we intend to raise — and seek to change — with servicers as we begin negotiations."
Laurie Goodman, a mortgage bond analyst for Amherst Securities who has accused servicers of acting contrary to investor interests, said that the settlement terms would, if implemented, resolve fundamental conflicts of interest.
"The stuff on force-placed insurance is very positive," she said. "What it will do is lower [investors'] eventual loss severities."
Even the scant data available on the sector's finances is sufficient to show how much banks and other servicers may have at stake.
Last year, a leading force-placed insurer, Assurant Inc., collected roughly $2.7 billion of premiums through its specialty insurance division, which is overwhelmingly devoted to force-placed insurance. Of that it paid out claims equaling 36% of its take — though in the company's other lines of business, a 70% claims-to-premiums ratio is the norm. (The company has said that low recent hurricane losses explain the difference, though even in bad years claims have remained far below the levels seen in other businesses.)
But while high premiums and low losses consistently make force-placed insurance the company's most profitable segment, the company doesn't get to keep all of the extra money. According to the company's SEC filings, 40% of the division's revenue is eaten up by "general expenses," a category that includes commissions to the banks. In other lines of insurance, overhead and expenses are usually a fraction of policyholder claims.
Assurant does not provide a breakdown of its expenses, but analysts say that referral fees, commissions and other payments to bank affiliates explain why the overhead is higher — implying paydays for servicers amounting to hundreds of millions of dollars a year. Other insurers operate similarly, borrower advocates and analysts say; they just disclose less than Assurant in their financial statements. While servicers that partner with force-placed insurers customarily perform little of the work in monitoring their portfolios for lapses and writing policies, payments to them are simply a cost of doing force-placed business.
The crackdown on force-placed insurance would be unmitigated bad news for servicers. But insurance industry analysts said that it might be less of a problem for the insurers themselves.
"That the servicers can't share in the fees and commissions, that's actually a positive for the force-placed companies," said Jimmy Bhullar, an insurance industry analyst with JPMorgan Chase & Co. "That could increase the margins."
But the proposed settlement also could threaten pricing and volume for banks' insurer partners. Analysts are less concerned about the requirement that force-placed policies carry a "commercially reasonable price" than the requirement that servicers must continue to advance premiums for homeowners' existing policies and attempt to renew them when they lapse. Such moves would save money for borrowers and investors, and they would likely result in fewer force-placed policies being written. But because it is common for insurers to have full control over monitoring servicers' portfolios and issuing force-placed policies, it is hard to say who would be responsible for attempting to renew a borrower's coverage.
"I don't have any reason to believe that doing that would be particularly difficult, but I don't know that the force-placed insurance companies are going to try real hard," said Jeff Golant, a Pompano foreclosure and insurance attorney who has filed multiple suits alleging force-placement abuses.
QBE Group, a large insurer that recently purchased Bank of America Corp.'s Balboa force-placed insurance business, declined to speak about the potential impact of the rules on its operations. Assurant said that it would not be affected by provisions of the settlement requiring adequate notice before force-placed policies are issued and reasonable pricing.
"Many of the suggestions reflect the disciplined processes and procedures that are currently well established and practiced by our clients and Assurant Specialty Property today," a spokeswoman for the company said.
"At the same time," the spokeswoman said, "there are some areas that will require further clarification or may be difficult to practically apply."
The company noted that it was not a party to the negotiations between servicers and the attorneys general.
Given the money at stake, borrower advocates said they expect the country's largest banks would raise plenty of objections on their own accord.
"I'm automatically skeptical about implementation," Golant said. "I find it hard to believe the industry is going to simply say OK, and agree to that," he said.