Like many controversies, mortgage lenders' use of force-placed home insurance arose from what was once a well established and unquestioned practice. For many years, homeowners who failed to maintain property insurance could count on their banks buying it for them and passing on the cost.
It is the way that banks have been buying such insurance that's become a hot topic recently. Most of the nation's top mortgage servicers outsource their force-placed programs, yet reap commissions on the policies. Consumer advocates have alleged such arrangements amount to pay-to-play kickbacks in which insurers pay banks for access to borrowers and then stick homeowners with exorbitant premiums.
With the scrutiny, force-placed insurance has become a focus of a slew of regulatory and legal challenges. A number of class actions have been filed against lenders. New York's Department of Financial Services launched a broad investigation, and California's insurance commissioner has demanded that insurers lower their premiums. Fannie Mae also announced plans to restrict force-placed commissions.
Banks themselves have said little publicly about their force-placed programs. Last month, however, American Banker spoke with Kevin McKechnie, executive director of the American Bankers Insurance Association, about the force-placed furor, the industry's response and possible areas of compromise. Following is an excerpted version of the interview.
Are you surprised by how controversial force-placed insurance has become?
KEVIN MCKECHNIE: It's a direct result of the foreclosure wave. Not surprisingly, people are looking at the form, the corporate structure and the cost issues. But there seems to be a great deal of yeoman's work on educating the populace about how the product actually works.
There's a misunderstanding [among many people] that borrowers who have voluntary homeowners insurance in place are getting stuck with force-placed policies. But lenders … only force-place when there's no valid insurance policy in place. If you understand that, a certain amount of this starts to make sense. The key for the consumer point of view, in all circumstances that we were able to find the focus is on repairing the collateral so the homeowner can repair the home.
I've heard frequent complaints that banks allow delinquent borrowers' coverage to expire and then force-place much more expensive policies. I've found examples of such claims in Florida court records, too, and regulators are looking to put a stop to it. What's the industry's take on the proper response when a borrower stops paying an escrowed insurance policy?
We asked our membership, and servicers say that as long as there's coverage in force, even if the account has insufficient funds, they [the banks] advance the funds. You only get to force placement when there's no valid insurance contract for the servicer to pay.
So we're not concerned about the CFPB [Consumer Financial Protection Bureau] so long as it does what's in Dodd-Frank, which is what we're doing anyway.
There's been a lot of criticism that banks are actively trying to force place coverage. It doesn't work that way. We're doing something the law doesn't require by giving borrowers free loans so they can pay their homeowners insurance. That's a big deal.
If that is in fact the way most servicers are handling escrowed accounts, that would remove a highly contentious issue from debate. But if we're going to fully commit to extending voluntary policies, why not just have the servicer re-up the contract with the voluntary insurer?
This is something the country hasn't grappled with and we haven't seen talked about sufficiently in the press. No one's contacted an insurer to ask "are you willing to accept the dollars that you get when the risks are more akin to those on force placed?"
And if you look at it from the voluntary insurers' perspective, there's cause for alarm. When you get to force placement, the risks aren't known. That's why force-placed policies are generally more expensive. It's because the insurer is providing a product for continuous coverage on collateral [a home] they haven't seen to a borrower they don't know.
The thing that initially drew my attention to force-placed insurance as a subject was the commissions force-placed insurers paid to banks. Why has buying insurance on behalf of borrowers turned into a profit center for lenders?
In states where it's permissible to collect commissions, generally lenders do. What we're looking at here isn't really whether it's correct or incorrect to collect a commission on force-placed insurance, because I think federal law makes it clear that's a permissible act.
But how can large banks justify collecting commissions on force-placed premiums at all, given that the lenders often outsource the complete administration of the force-placed program, with insurers handling loan tracking and fielding borrower contacts? One major bank's force-placed insurance agency didn't even employ insurance agents. So what are banks doing that warrants a commission if their only involvement is to give insurers rights to write policies on their portfolios?
I would contest the idea that there's no work being done for the remuneration a bank receives. The work is the vetting and selection of a carrier. It's in evaluating what metrics you apply, how effective your call center is, how quickly you return unearned premiums. In other areas, servicers collect fees, but in insurance it's always on a commission basis.
A lot of entities are challenging the propriety of these practices. Over the last few months, force-placed insurance commissions have drawn class actions, a New York Department of Financial Services investigation and a California rate review. Is the industry gearing up for a big fight?
If the social discussion is that we [the public and regulators] don't think you should take commissions on this product, bankers aren't insensitive to this request. A lot of the large banks are no longer taking commissions on this.
The problem is that it isn't like force-placement is without cost. … If there's a different way to pay for all the various things that servicers have to do in all the circumstances where force placement is required, I'm sure the banking industry would be happy to look at it.
It's disappointing that this is turning into a confrontational thing. This isn't about good guys and bad guys. It's about how the business works, nothing more. If you want it to work differently, let's go down to Congress and do something about it.
What's your take on the requirement in the national mortgage servicing settlement that the pricing of policies be "commercially reasonable?"
If the big servicers and state AGs [attorneys general] want to enter into an agreement saying that force-placed insurance will work the same way except prices will be commercially reasonable, nobody knows what that means. Does that mean that we end up in a situation where an insurance commissioner approves a rate for premiums, and then the attorney general comes in and says, "I don't like that"? Then you end up in a squeeze.
There was a lot of this sort of thing in the aftermath of Katrina, with homeowners' policies approved for sale in Mississippi. So that would be a well-trod path that we don't want to see again. We have a system for determining price, and it's based on the price the insurance commissioner provides. If we're going to change that, we should probably have a more protracted debate than we're having.