"Force-placed insurance" appears 478 times in the Consumer Financial Protection Bureau's mortgage servicing rules released Thursday. But the agency's proscriptions do not touch on many of the most controversial aspects about how banks buy the product.
That's the broad opinion of consumer advocates, insurance market observers, and Assurant, the largest insurer in the market for the specialty product. Also known as lender-placed coverage, force-placed insurance is a type of policy that banks purchase to protect homes when troubled mortgage borrowers allow their own policies to lapse.
"The CFPB's provisions concerning lender-placed insurance appear largely to follow the language in the Dodd-Frank Act and the disciplined processes Assurant follows," Assurant spokesman Robert Byrd wrote to American Banker, calling the product "an important safety net in the mortgage system."
The force-placed insurance rule generally sticks to a proposal that the CFPB floated last year and the terms of the national mortgage servicing settlement, neither of which has had a significant effect on industry practices. This may reflect at least in part the bureau's jurisdictional limits; under Dodd-Frank it is authorized to regulate mortgage servicing but not insurance — an industry that largely comes under the purview of state regulators.
The CFPB's new rules will assure that borrowers are warned in advance of force-placed insurance's cost and prevent banks from force-placing policies on many escrowed loans, according to a statement the agency released Thursday afternoon to American Banker.
"All consumers will receive protections before a servicer may impose a charge for a force-placed insurance," an agency spokeswoman wrote.
But the lack of further restrictions disappointed consumer advocates, who argue that banks collude with insurers to impose exorbitant force-placed premiums, split the profits and pass the bill to borrowers and mortgage investors. Over the last year, a series of state insurance regulators has launched probes into the financial dealings between mortgage banks and insurers. Their probes have included investigations of unexplained lump-sum payments from insurers to banks, profit-sharing reinsurance agreements that enrich bank affiliates and large insurance commissions paid to bank-affiliated insurance agencies that employ no agents.
"The new rule codifies existing industry practices or worse," writes Birny Birnbaum, executive director of the Center for Economic Justice, a nonprofit that represents the interests of low-income consumers.
The CFPB's comments don't reflect an appreciation of the perverse incentives at work in the market, he wrote, calling one portion of the rule "an invitation to servicers and insurers to continue to pack [force-placed insurance] charges with kickbacks to the servicer."
The CFPB rules do emphatically ban certain practices. But many of the barred activities are already illegal or practices that major banks and insurers say do not occur.
The new rules, for example, stipulate that banks must give borrowers ample notice before purchasing force-placing insurance — something bankers and insurers say is already standard practice. The CFPB also declared that banks must refund charges for policies issued in error, which is already legally required.
A third CFPB requirement stipulates that banks continue making payments on borrower's voluntary policies in escrow rather than replace them with force-placed coverage.
Whether such "advancing" of voluntary premiums happens already is a matter of dispute. In an interview last year, the American Bankers Insurance Association, an industry lobby, said that maintaining voluntary policies is best practice. However, in a statement Thursday the organization denounced a rule mandating it as a costly overreach.
"This prohibits servicers from force placing coverage as long as the servicer can continue the borrower's insurance policy," the group wrote in a statement on Thursday afternoon. "The rule was meant to provide help to borrowers experiencing hardship during the economic crisis, but instead it risks imposing greater borrowing costs on all mortgagors in the future."
In some instances, the CFPB rule appears to acknowledge flash points in the current force-placed debate while not clearly addressing them.
One area of contention, for example, is the "backdating" of force-placed policies. Banks and their insurer partners are responsible for monitoring borrowers' homes for insurance lapses, but sometimes fail to immediately notice borrowers are no longer insured.
When banks and insurers finally do catch on, borrowers are often billed retroactively for the missed premiums. Banks say that providing continuous coverage is essential, while consumer advocates say the fees amount to a reward for incompetence.
The CFPB rules require that banks give homeowners 15 days notice before charging any fees, but do not say that banks can't charge backdated premiums after that point.
Another area lacking specificity is under what circumstances banks may collect a cut of force-placed insurance premiums through commissions and other payments.
Under the terms of the CFPB rule, banks are supposed to collect payments only for work they actually perform. (Such a prohibition is a core element of the Real Estate Settlement Procedures Act.) But the rules do not appear to explicitly ban the commissions some mortgage servicers collect for amorphous oversight work.
"It seems like the CFPB failed to get the conflict for a servicer which has a large financial interest in placing FPI," Birnbaum said.