Force-Placed Insurance: Another Multi-Billion Dollar Industry Caught in the Regulatory Cross Hairs

    By Karen C. Yotis, Esq.

Forced-placed insurance (FPI), which is sometimes referred to as 'lender-placed insurance,' is a specialty product that is intended to insure properties when standard property coverage is allowed to lapse. During the housing boom, FPI occupied an overlooked corner of the hazard insurance business. Its importance has been growing, both as a result of increased demand for FPI in the wake of the nation's housing crisis, but also because of the rising vulnerability of property to damage from increased catastrophe activity.

FPI arises out of a requirement that mortgage owners impose upon borrowers to maintain continuous insurance coverage on the property that serves as collateral for a mortgage loan. FPI also facilitates the smooth functioning of the primary and secondary residential mortgage markets and serves as a means of satisfying the requirements placed on the mortgage market by federal regulators.

Maintaining continuous insurance coverage on properties involves tracking loans for evidence of required insurance (a task that is typically outsourced to the insurer providing FPI) and placing insurance on properties for which the borrower has not maintained the required coverage. The lender is typically the named insured party on an FPI policy, although the borrower is usually listed as an "insured." The majority of FPI policies are issued when the borrower loses normal insurance due to non-payment of premium.

The basic characteristics [1] of the FPI product include:

·  Group coverage for all properties in a lender's loan portfolio;
·  Automatic coverage from the Date of Lapse on the borrower's homeowners policy;
·  Limited coverage compared to a homeowners policy (no coverage for personal property, liability, additional living expenses, etc.);
·  No underwriting of individual properties; and
·  Coverage for hazard, flood, excess flood, wind, and excess wind perils.

Here's how it works:  Mortgage servicers (the largest are Wells Fargo ($1.84 trillion), Bank of America ($1.69 trillion), Chase ($1.11 trillion), and Citi ($515 million) out of a nationwide total of $10.2 trillion) that manage mortgages on behalf of mortgage owners (Fannie Mae and Freddie Mac own directly or indirectly over 50 total million mortgages and are the country's two biggest mortgage guarantors) [2] pay the FPI Insurer for an FPI policy issued over a specified period. The servicer then bills the borrower (homeowner) for the FPI premium. Retroactive billing is commonplace. Included in the bank's FPI premium is a waterfall of compensation streams that flow to the mortgage servicer, which may include commissions, cash payments for marketing, captive reinsurance, and other free or subsidized services for the mortgage servicer. In the event that the borrower defaults or the borrower's mortgage goes into foreclosure, the mortgage owner is responsible for paying the FPI premiums. Thus, when banks are not reimbursed for their FPI protection from cash-strapped homeowners, they pass along the bill for their sizeable FPI premiums to over-exposed investors, which basically mean Fannie and Freddie. And therein lies the rub.

FPI has generated a good deal of regulatory attention over the past year as no less than five regulatory bodies and all 50 attorneys general have taken steps to place boundaries around a coverage strategy that has long been part of the mortgage landscape. On April 18, 2013, New York officials announced a settlement with QBE, the nation's second-largest FPI insurer, which followed hot on the heels of an earlier March 21 similar settlement with Assurant, Inc., the nation's largest FPI insurer. Just prior to the New York settlements, the Federal Housing Finance Agency (FHFA) proposed a new rule that would bar banks from charging fees and commissions on FPI policies. February, 2013, saw the Consumer Financial Protection Bureau (CFPB) publish final rules under the authority of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) that make major changes to the mortgage loan servicing requirements of Regulation X, which includes provisions relating to FPI.  These major developments during the early part of 2013 should come as no surprise given the attention FPI received during 2012. The National Association of Insurance Commissioners (NAIC) held extensive hearings on FPI in April, 2012, several states proposed FPI legislation, and FPI was an integral part of the National Mortgage Settlement. And as surely as May flowers follow April thunderstorms, all of this regulatory activity has spawned a veritable breeding ground for the consumer class action lawsuits that are being filed around the country alleging fraud and other misconduct on the part of lenders and insurers in connection with FPI transactions.

This commentary reviews the history of FPI, discusses the economic factors and consumer issues that have brought FPI into the forefront, analyzes recent regulatory enactments relating to FPI, identifies recent class action court filings, and outlines the various developments on the horizon that will continue to present unique compliance challenges for insurers, lenders, and other participants in the FPI market.

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[1] Public Hearing on Lender-Placed Insurance, Property and Casualty Insurance (C) Committee and Market Regulation and Consumer Affairs (D) Committee National Association of Insurance Commissioners 2012 Summer National Meeting (Aug. 9, 2012) (testimony of Bernie Birnbaum, Center for Economic Justice).

[2]Public Hearing on Lender-Placed Insurance, Property and Casualty Insurance (C) Committee and Market Regulation and Consumer Affairs (D) Committee National Association of Insurance Commissioners 2012 Summer National Meeting (Aug. 9, 2012) (testimony of Bernie Birnbaum, Center for Economic Justice).

Karen C. Yotis has been an Illinois attorney for 24 years and specializes in the areas of social media and insurance regulatory compliance. She is a recognized industry expert on the intersection of insurance and social media, conducts social media training seminars for corporate executives and insurance professionals and speaks at trade shows and industry events on social media and insurance topics. Ms. Yotis is National Co-Chair of the Communications/Social Media Committee for the Association of Insurance Compliance Professionals, Vice President of the AICP's Great Lakes Chapter, and past Chair of the AICP's Publications Committee, which is responsible for that organization's quarterly Journal publication. She is also a regular contributor to the national edition of the LexisNexis Workers' Compensation e-Newsletter and her commentary has appeared on lexis.com, in Viewpoint, and in other insurance industry publications. She was also Managing Editor of the Mealey's Insurance Regulatory Compliance Report. Ms. Yotis is also a member of the Hosting Services/Digital Presence Team for TEKSystems/State Farm Insurance Company, where she leads initiatives on content management/strategy and community building. She also served as a Community Manager for the LexisNexis Communities, including the LexisNexis Insurance Law, the Environmental Law/Climate Change, Toxic Torts/Personal Injury, and Workers' Compensation Law Centers. Ms. Yotis participated in the development and enhancement of LexisNexis Insurance Compliance and participated as a member of the LexisNexis Insurance Advisory Board and the LexisNexis Workers' Compensation Advisory Board. Ms. Yotis is a graduate of the Northwestern University School of Law and received her undergraduate degree from the University of Illinois. Ms. Yotis can be contacted at karenyotis@gmail.com.

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