Lender-Placed Insurance Scrutinized by Regulators

By Sari R. Updated on 3/27/2013

Maintaining property insurance is a condition that is imposed on most individuals who borrow money from a lender to purchase a house.  If that borrower allows that policy to lapse, their lender will purchase a policy and will bill the homeowner for it in order to protect their investment.

This practice is known as lender-placed (or force-placed) insurance and has become the recent scrutiny of state and federal regulators.  The reason why is because these policies often carry premiums that are significantly higher than the policies that they are replacing; these hidden costs might be unfair and unknown to homeowners.

The FHFA proposed a new rule on Tuesday that would forbid insurance companies from doling out sales commissions for lender-placed insurance to mortgage servicers or lenders.  After a 60-day test period, the FHFA will revise its proposal, which will officially be issued by the end of the year.

Because of the financial crisis, lender-placed insurance demands have grown, as have Fannie Mae and Freddie Mac expenses. Multiple regulators have shown concerns regarding unwarranted costs and rates thrown onto borrowers, in addition to compensation and commissions paid to servicers by insurance carriers. 

Last week, a $14 million settlement was reached with Assurant – one of the largest servicers of lender-placed insurance.  This settlement included some provisions that will forbid select expenses and commissions.  Because of this settlement, Assurant will also have to file its rates and expenses with the state of New York; New York insurance regulators will also be allowed to monitor Assurant’s practices at their leisure. 

Investors believe that the reason why premiums are currently sky-high is because banks and insurers have been building a network of payoffs and relationships.  This network was made up of improper practices, which landed investors, taxpayers and homeowners with millions of dollars of unnecessary costs and debts.

The FHFA commented that lender-placed insurance premiums are often more than double the cost of insurance directly purchased by a homeowner.

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