New York's Department of Financial Services has reached a deal with several small specialty insurance carriers, triggering a statewide ban on force-placed insurance payments to banks.

The deal makes New York the first state to block alleged kickbacks which consumer advocates say help push struggling homeowners into foreclosure.

"These reforms will now cover all of the New York market, but more can and should be done," says a press release quoting Department of Financial Services superintendent Benjamin Lawsky. "Unless other regulators across the country move swiftly to crack down on the kickbacks and payoffs we found in the force-placed insurance industry, millions of Americans will remain at risk."

Force-placed insurance is a type of backup homeowners insurance policy meant to protect mortgage investors when homeowners let their property insurance lapse. Banks are in charge of buying the product, but pass the cost of premiums on to borrowers and mortgage investors. Industry critics allege that this has resulted in "reverse competition," in which banks and insurers collude to inflate the price of the insurance and then split the profits.

An earlier review by the Department of Financial Services concluded that such collusion was occurring in the $5 billion-plus a year force-placed insurance industry. At hearings last spring, Lawsky blasted those financial ties, saying they "harm both homeowners and investors while enriching the banks and the insurance companies."

The four carriers that entered into the agreement on Thursday — American Modern Insurance, Chubb, Fidelity and Deposit Company of Maryland, and FinSecure — hold only a small portion of the state's force-placed insurance market. But the state's deal carries weight because the dominant carriers, Assurant and QBE Americas, have already agreed to halt commissions and reinsurance payments as soon as their competitors committed to doing the same.

New York will also draft a regulatory prohibition on such payments, but a spokesman for Lawsky says that the prohibition will go into effect "immediately."

According to the agreements, insurers will refrain from making any payments to banks and from providing them with any free or discounted services. A similar ban on payments is under consideration by the Federal Housing Finance Agency.

Other states have taken more limited action to reduce the cost of force-placed insurance, but have not directly tackled the propriety of commissions.

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