The New York State Insurance Department has warned mortgage insurers not to run afoul of the state's laws when doing business with lenders' reinsurance subsidiaries.

John Calagna, a spokesman for the department, said it appears one company has violated some of the laws. He declined to name the company.

The department sent a letter last week to every mortgage insurance company licensed in the state, about 20 in all, warning them not to violate any New York insurance laws when setting up these captive arrangements. The department likes "to put the industry on notice" when it finds a particular problem, Mr. Calagna said.

Under a captive structure, a lender establishes a subsidiary to reinsure loans the lender originates. A private insurer covers the loans but lays off some of the risk on the reinsurance subsidiary, which receives part of the premium.

According to Mr. Calagna, that payment to the reinsurance subsidiary must be proportional to the risk it assumes. He said the unit in question was paid more, in violation of the state's law against "controlled business arrangements."

The department's letter said the relationship also violated New York insurance law because the premiums paid to the reinsurance subsidiary were meant as inducement for the lender to do more business with the third-party insurer.

"The issue involves payment to an individual to induce that individual to send insurance to your firm," said Jerome Selitto, executive vice president of Amerin Guaranty Corp, a Chicago-based mortgage insurer. Amerin is one of the pioneers of the captive mortgage reinsurance product.

Mr. Calagna said the Insurance Department's letter was not meant as a "blanket prohibition" of captive reinsurers. Such companies can do business in New York but cannot be based there. The Insurance Department hopes that laws will be passed that will allow the subsidiaries to be based in New York.

Gerald L. Friedman, chairman and chief executive officer of Amerin, said he was very surprised about the department's action. He said Amerin had met with departmental officials more than a year ago and had discussed captive reinsurance.

"Until we received the letter, the department had voiced no objections to the concept," Mr. Friedman said.

United Guaranty Corp., another mortgage insurer that has been helping lenders set up reinsurance subsidiaries, issued a statement defending captive reinsurance.

"The lender-captive-reinsurance structure clearly requires risk transfer supported by capital, and does not represent a payment in connection with the placement or referral of insurance," United Guaranty said.

Mr. Calagna said each mortgage insurer should meet with the department to discuss how to comply with New York's laws. Amerin and United Guaranty are both planning to do so, company officials said.

The Office of the Comptroller of the Currency said late last year that commercial banks could engage in mortgage reinsurance. To date, the Comptroller's Office has approved the applications of Chase Manhattan Corp. and PNC Bank Corp. to set up captive reinsurance subsidiaries.

Chase and PNC are setting up theirs in Vermont because of more liberal regulations.

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