Bankers and specialty insurance executives defended their force-placed insurance practices and dodged questions about alleged industry kickbacks and price gouging at a private but well-attended "working group" hosted by regulators Thursday.
The meeting which was closed to member of the press and public comes as the Federal Housing Finance Agency is considering its options for dealing with force-placed insurance, a type of backup property insurance that banks are supposed to buy to protect mortgage investors' stake in the homes of uninsured borrowers.
The once-obscure product became increasingly controversial and expensive to the government in the wake of the housing collapse. Over the last two years, plaintiffs' attorneys, Fannie Mae, and state regulators have uncovered apparent pay-to-play schemes in which banks paid inflated prices for the insurance and received hundreds of millions of dollars in unearned commissions, free services and sweetheart reinsurance deals in return.
Those benefits have distorted the force-placed market and stifled legitimate competition, some panelists suggested. Zurich Insurance Group, a major international insurer, told the FHFA that it wanted to get into the market, and insurance brokerage and services firm OSC alleged that the market was currently open only to those willing to pay to play.
"We're not going to provide commissions or free or subsidized services, and the giants do," said Jose Perez of OSC, according to event attendees. "That's why we don't win" contracts.
The FHFA's Thursday event drew between 60 and 80 people, say several people who were in attendance. Most of those present were industry representatives, though at least seven state insurance regulators attended, along with representatives from the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency, and the Consumer Financial Protection Bureau.
The talks sometimes had a scripted feel, attendees said reflecting that the FHFA had encouraged industry panelists to coordinate their testimony in advance, according to people familiar with the planning discussions.
The FHFA acted primarily as an officiant throughout, generally avoiding confrontational questions. But agency officials expressed occasional concerns that force placed premiums might be too high and that the industry might be insufficiently competitive.
But attendees from the Office of the Comptroller of the Currency as well as New York, Florida, and Minnesota insurance regulators repeatedly asked questions about how the payments and free services banks receive might affect industry behavior.
According to attendees, Thursday's proceedings opened with an overview of force-placed insurance by Birny Birnbaum, an insurance expert and consumer advocate. Next, Joy Feigenbaum, an investigator for New York's Department of Financial Services, spoke about how her state's probe into force-placed kickbacks led it to ban payments to banks and demand insurers lower their rates. A representative from force-placed insurance provider WNC followed, giving an industry perspective.
The banking industry represented by executives from Wells Fargo (WFC) and JPMorgan Chase (JPM) spoke about the burden of existing regulation and declared that they encouraged borrowers to avoid force-placed insurance whenever possible. Wells Fargo's David Franske said concern that force-placed insurance helps tip borrowers into foreclosure is overblown, because the majority of borrowers who are force-placed are behind on their mortgage payments already. The banks broadly defended financial arrangements with insurers, though they declined to address such topics in detail.
"Barry Wides from the OCC asked if Wells received other compensation or benefits from the premiums in any other way," said one person whose recollection was confirmed by others. "And Wells said that wasn't a question it was going to get into in this venue." (Wides is the deputy comptroller for community affairs.)
Wells has previously stated in public that it receives no compensation, services, or other benefit in relation to force-placed insurance. A spokeswoman for the bank said only that the bank's positions have not changed, and referred questions to the FHFA.
The second panel featured Assurant (AIZ) and QBE, the two major force-placed insurers that dominate the market. Acting as a tag team at times, representatives from the two companies defended current industry practices and argued that the FHFA and other federal regulators should leave regulation of force-placed insurance to the states.
The two companies also sought to justify the high price of force-placed insurance compared to the amount they pay in claims. Data collected by the National Association of Insurance Commissioners and cited by consumer advocates suggests that the profit margins on force-placed products are extraordinarily high compared with other types of insurance.
"Why are your losses lower than for homeowners insurance even in catastrophic years?" Florida Office of Insurance Regulation Actuary Robert Lee asked. The companies responded simply that losses could be higher in the future.
The companies defended the unusual practice of paying commissions to their clients, though they noted that some banks no longer accept cash payments.
"To the extent that Lenders cease using affiliated agents or having reinsuring business with affiliated insurers, Assurant's next generation [lender-placed insurance] policy incorporates rate credits that automatically adjust premiums downward resulting in lower premiums for the borrower," said John Frobose, the president of Assurant's force-placed insurance division, in prepared remarks shared with American Banker.
A third panel included smaller insurance companies and brokers, such as OSC and Proctor Financial. OSC which was previously chosen by Fannie Mae to build a program to directly purchase force-placed insurance was the most combative of the group, saying that it would gladly take on Fannie Mae and Freddie Mac's force-placed insurance work at a steep discount to the prices currently charged by QBE and Assurant.
The OSC plan would have saved Fannie Mae hundreds of millions of dollars a year in insurance costs, according to documents obtained earlier this year by American Banker. The FHFA scuttled Fannie's plan in February, declaring that force-placed insurance needed more study. Only a month later, however, the FHFA abruptly announced intentions to ban commissions and reinsurance payments.