The Federal Housing Finance Agency banned banks and mortgage servicers in June from accepting commissions on force placed insurance policies issued by affiliated companies. But at least one servicer has found a way around the ban by selling an insurance-agent affiliate to a company it has close ties with.
Benjamin Lawsky, the superintendent of New York's Department of Financial Services, is the first regulator to question the move by Ocwen Financial. Consumer advocates expect federal and state regulators will crack down on servicers and insurers that try to go around the ban. The rule is meant to prevent kickbacks that encourage overcharging of borrowers.
Sandra Thompson, the FHFA's deputy director for housing mission and goals, said reducing borrower costs for force-placed insurance is a priority for the agency.
"If a transaction results in violation of Fannie Mae's and Freddie Mac's guidelines, or is purposely designed to circumvent the guidelines, FHFA will work with Fannie Mae and Freddie Mac to ensure appropriate action is taken," Thompson said in a statement.
So far, Lawsky has only targeted Ocwen, which last year sold Beltline Road Insurance Agency, a force-placed insurance affiliate, to Altisource Portfolio Solutions for $86 million. Altisource, a Luxembourg-based distressed property manager, was spun off from Ocwen in 2008. It's led by former Ocwen executives and is 26% owned by William Erbey, Ocwen's executive chairman.
Ocwen and Altisource did not respond to requests for comment.
Birny Birnbaum, the executive director of the Center for Economic Justice, called the sale "an attempt to go around the ban." The $86 million purchase price "represents a front-loaded commission," he said.
"It's a big deal because it's a blatant attempt to evade the prohibition against giving kickbacks in the guise of a commission to an insurance agent," Birnbaum said. "Any reasonable regulator will conclude that it violates the prohibition and we expect both state and federal regulators to object to the practice and not allow it."
Force-placed insurance policies are bought by servicers when a borrower allows a homeowner's insurance policy to lapse, usually because of default or foreclosure. Since borrowers typically cannot pay the new high-priced policies, the costs are passed on to Fannie Mae, Freddie Mac, (and hence taxpayers) as well as investors.
The FHFA's Office of Inspector General has urged the regulator to sue force-placed insurers and mortgage servicers, including large banks, for inflating prices and generating losses for Fannie and Freddie.
Many of the largest banks and New York insurer Assurant, the largest force-place insurer, have agreed to reforms after settling class-action lawsuits brought on behalf of borrowers. Banks that have settled include Bank of America, Citigroup, JPMorgan Chase, Wells Fargo, HSBC, and SunTrust.
"They have really stepped up in our cases and agreed to help consumers and reform the law," said Adam Moskowitz, a partner who runs the class action practice at Miami law firm Kozyak Tropin & Thockmorton.
Moskowitz has 14 nationwide class-action lawsuits pending on force-placed insurance including one against Ocwen.
Because of the settlements, it is unclear whether attempts to go around the ban are widespread.
Lawsky sent a letter on Aug. 4 to Timothy Hayes, Ocwen's general counsel in West Palm Beach, Fla., asking for additional information about its force-placed insurance practices. Ocwen allowed its force-placed arrangement with Assurant to expire in March 2014. Beltline, now a unit of Altisource, then negotiated a new force-placed insurance program for Ocwen with San Antonio-based insurer Southwest Business Corp., Lawsky's letter stated.
Southwest Business, as an unaffiliated insurance agent, is apparently being used "as a pass through so that Ocwen and Altisource are not directly contracting with each other, but Altisource can still receive insurance commissions and certain fees seemingly for doing very little work," Lawsky said in the letter.
"As part of this arrangement, Altisource recommended itself to provide fee-based services to" Southwest, the regulator said.
"A careful review... suggests that Ocwen hired Altisource to design Ocwen's new force-placed program with the expectation and intent that Altisource would use this opportunity to steer profits to itself."
Lisa Pinto, a spokeswoman for Southwest, said the company has reviewed Lawsky's letter.
"We remain confident that our relationship to the subject transaction is appropriate," she said in an email.