New York state regulators have proposed a sweeping set of rules to reform the force-placed insurance industry, in the latest sign that the government is taking steps to correct what critics call an abusive industry practice that overcharges homeowners.
The new rules would seek to lower rates, protect homeowners and eliminate the "kickback culture" in the force-placed industry, New York Gov. Andrew Cuomo announced Thursday. The rules are an attempt by Cuomo and the New York State Department of Financial Services to apply to the entire industry, including future entrants, a set of reforms it imposed through settlements with major force-placed insurance providers earlier this year.
The rules would forbid New York insurers from paying commissions to banks or servicers and prevent them from issuing policies on properties serviced by affiliated companies, among other changes.
New York is the first state to propose a comprehensive ban on force-placed insurance payments to banks. Other states, including Florida, have imposed more limited reforms that limit, but do not ban, the so-called kickbacks.
Earlier this year, New York agreed to settlements with the six companies that provide force-placed insurance in New York - Assurant, QBE, and four smaller specialty insurers - under which they would cease paying commissions to banks. Thursday's announcement formalizes the new ground rules for the industry going forward
It may also pressure national regulators to impose stricter rules. The Federal Housing Finance Agency is currently studying the $5 billion-a-year force-placed industry and considering a ban that would apply nationwide. But FHFA has been criticized for its soft-touch approach and close ties to the industry.
With Thursday's announcement, Cuomo and his former aide, DFS Superintendent Benjamin Lawsky, continue to signal that they intend to be among most aggressive state-level regulators on financial issues.
"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," Cuomo said in a news release Thursday. "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."
Force-placed insurance is insurance taken on out on property by a lender or servicer when the homeowner does not maintain the insurance the mortgage requires. The New York agency's investigation into the practice, begun in 2011, found that premiums charged to homeowners under force-placed insurance can be up to 10 times as high as under voluntary insurance.
Though a force-placed policy is imposed by the mortgage servicer, the bill is charged to the homeowner. If the homeowner cannot pay, the bill is passed along to mortgage guarantors like Fannie Mae and Freddie Mac - and ultimately, therefore, to taxpayers
New York's investigation also found that insurers competed for business by offering banks and servicers a portion of the profits on the policies -- a practice the DFS called "kickbacks" -- thereby encouraging banks to choose policies with high premiums.
"Our investigation uncovered a kickback culture in this industry that inflated premiums and did serious damage to struggling homeowners," Lawsky said in the news release. "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."
Other rules that New York made official Thursday include requirements that insurers tell homeowners that they can buy voluntary coverage to replace their force-placed policies at any time, and that they notify the DFS when their loss ratios fall below a certain threshold, to ensure that they do not inflate premiums. The rules also prohibit insurers from over-insuring properties and require them to reimburse homeowners for any period where there is overlapping insurance on a home.
Last week, JPMorgan (JPM) agreed to pay as much as $300 million to settle a suit over its own force-placed mortgage practices. Wells Fargo (WFC) and the insurer QBE agreed to pay $19 million to settle a Florida suit in May.