The New York Department of Financial Services (DFS) recently issued proposed force-placed insurance regulations to reduce premiums and eliminate kickbacks that it claims are pervasive in the industry. The regulations will take effect 30 days after publication in the State Register. Insurers and their affiliates should immediately review and update their compliance processes in light of this development, as further DFS enforcement and regulatory action is likely.
The proposed regulations follow an extensive industry investigation by the DFS in 2011. The DFS claimed that force-placed premiums are two to 10 times higher than the premiums for hazard insurance purchased by the borrower. In addition, the DFS alleged that the insurer frequently provides a kickback to the loan servicer, based on the amount of the premium. The DFS asserted that the alleged kickbacks cause loan servicers to select force-placed policies with the highest premium.
The proposed reforms include a number of substantive restrictions on forced-placed policies and the relationship between the insurer and the mortgage servicer and its affiliates. Under these restrictions, insurers shall not:
• Issue force-placed insurance on a property serviced by their affiliates
• Pay commissions to a servicer or its affiliates for force-placed insurance obtained by that servicer
• Make any payments, including expenses, to a servicer or its affiliates to secure future business
• Provide free or below-cost outsourced services to a servicer or its affiliates
• Reinsure a force-placed policy with an affiliate of the servicer that obtained the policy
• Base force-placed commissions on underwriting profitability or loss ratios
• Issue a force-placed policy in excess of the borrower’s previous hazard insurance limits, unless the prior policy did not provide the required coverage under the mortgage loan
In addition, within 15 days of receiving confirmation that the borrower has adequate hazard insurance coverage, the insurer must cancel the force-placed policy and refund any force-placed premiums assessed for any period of overlapping coverage.
The proposed reforms also require additional disclosures:
• If the insurer delivers force-placed insurance notices to the borrower on behalf of the loan servicer, the insurer must, at least 45 days before force-placing insurance, furnish two written notices to the borrower advising that hazard insurance is required under the mortgage loan and that such insurance will be force-placed if the borrower fails to provide evidence of adequate coverage.
• If the insurer delivers notices relating to the renewal or replacement of force-placed insurance to the borrower on behalf of the loan servicer, the insurer must, at least 45 days before renewing or replacing the policy, furnish written notice to the borrower advising that the servicer previously force-placed insurance on the property and the servicer will renew or replace the policy if the homeowner fails to provide evidence of adequate coverage.
• If the insurer accepts correspondence from the borrower relating to force-placed insurance on behalf of the loan servicer, the insurer shall accept “any reasonable form of written confirmation” that establishes the homeowner’s hazard policy complies with the mortgage loan.
Governor Andrew Cuomo championed the proposed regulations as “tough new regulations to protect homeowners” and warned that “insurers should be on notice that New York State is going to continue rooting out abuse in the industry and protecting taxpayers.” Benjamin M. Lawsky, the DFS Superintendent, added that “these new rules will help ensure that homeowners remain protected and force-placed insurers don’t simply slide back to the bad old practices of the past.”
The DFS’ regulations mark the latest step in a concerted crackdown on the force-placed industry. The Consumer Financial Protection Bureau had previously issued new regulations under RESPA, effective January 10, 2014, which impose additional disclosure obligations on loan servicers before assessing force-placed charges on borrowers.
Ballard Spahr’s Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs). Our litigation defense experience includes representing lenders and servicers in class actions challenging their force-placed insurance practices.
The group includes the firm’s Mortgage Banking Group, which combines broad regulatory experience assisting clients in both the residential and commercial mortgage industries with formidable skill in litigation and depth in enforcement actions and transactions. Our attorneys, including the attorneys who joined us from the New York City litigation firm Stillman & Friedman, P.C., to form Ballard Spahr Stillman & Friedman LLP, have substantial experience in handling litigation with the DFS and the New York Attorney General.
For more information, please contact CFS Practice Leader Jeremy T. Rosenblum at 215.864.8505 or firstname.lastname@example.org, Mortgage Banking Practice Leader Richard J. Andreano, Jr., at 202.661.2271 or email@example.com, Justin Angelo at 212.223.0200 x8012 or firstname.lastname@example.org, Brian D. Coad at 212.223.0200 x8034 or email@example.com, Scott M. Himes at 212.223.0200 x8047 or firstname.lastname@example.org, James A. Mitchell at 212.223.0200 x8006 or email@example.com, or Marjorie J. Peerce at 212.223.0200 x8039 or firstname.lastname@example.org.
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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.
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