Recent Force-Placed Insurance Initiatives by FHFA & CFPB Suggest Divergent Priorities
By: Nanci L. Weissgold, *Christopher Shelton
* Mr. Shelton is not admitted in D.C. Supervised by Nanci Weissgold, member of D.C. Bar.
Force-placed insurance is under continuing scrutiny by the Federal Housing Finance Agency (FHFA) and the Consumer Financial Protection Bureau (CFPB). However, each agency’s focus is slightly different. FHFA, perhaps galvanized by a New York enforcement action, has focused on conflicts of interest between servicers and insurers. The CFPB has focused on erroneous placing of insurance and excessive charges.
Background
“Force-placed” or “lender-placed” insurance is property insurance obtained by mortgage servicers when the borrower fails to demonstrate adequate insurance coverage. The cost is generally charged to the borrower, but for Fannie Mae or Freddie Mac loans, the enterprise may end up paying the bill if the borrower fails to pay. Thus, perceived abuse of force-placed insurance is both a consumer protection issue and a potential drain on Fannie Mae and Freddie Mac’s finances.
FHFA Focus on Conflicts of Interest
FHFA’s concern about force-placed insurance is that certain conflicts of interest are driving up the cost of force-placed insurance to the detriment of borrowers, Fannie Mae, and Freddie Mac. Specifically, if the servicer is an affiliate of an insurer or receives kickback payments, the servicer may not drive the hardest bargain for force-placed insurance.
FHFA first officially expressed concern about these conflict-of-interest issues within days of a March 2013 settlement between New York Superintendent of Financial Institutions Benjamin Lawsky and the nation’s largest force-placed insurer. The consent order states that the insurer paid commissions to insurance agents and brokers that are affiliates of servicers, used reinsurers affiliated with servicers, and made payments to servicers for certain expenses. This was allegedly a form of “reverse competition” to reward servicers for selecting the insurer, in place of competition for the lowest insurance premiums, and violated New York insurance laws.
At FHFA’s direction, Fannie Mae issued Servicing Guide amendments in December 2013, effective on June 1, 2014, that addressed perceived conflicts of interest: “Fannie Mae is now requiring that the lender-placed insurance premiums charged to the borrower or reimbursed by Fannie Mae must exclude commission or payments earned or received by the servicer, or other entities or individuals affiliated with the servicer (employees, agents, brokers, etc.).” Additionally, “Fannie Mae now requires that the [insurer or reinsurer] must not be an affiliated entity of the servicer.” Finally, Fannie Mae requires servicers to submit a certification of compliance with force-placed insurance requirements. Freddie Mac has introduced similar conflict-of-interest and certification requirements, worded slightly differently but effective on the same date.
FHFA rejected a bolder plan that Fannie Mae proposed in which Fannie Mae might have placed insurance directly, rather than relying on servicer to do so, which Fannie Mae maintained would result in significant savings. Some consumer advocates argued that FHFA gave in to industry pressure in rejecting that path.
In May 2014, FHFA’s strategic plan for the enterprises’ conservatorship identified force-placed insurance abuse and overcharging as one of its top priorities. Thus, FHFA is likely to introduce further reforms in 2014.
CFPB Focus on Erroneous Placements and Excessive Charges
The CFPB’s RESPA Servicing Rule, effective January 10, 2014, implemented portions of the Dodd-Frank Act by establishing procedures to prevent the erroneous force-placement of insurance when the borrower in fact has adequate coverage. The servicer must generally send specific notices to the borrower before charging him or her for force-placing insurance and refund money when there is overlapping coverage, among other requirements. See generally 12 C.F.R. § 1024.37.
The RESPA Servicing Rule also limits charges to the borrower, generally allowing only those that are bona fide and reasonable, for a service actually performed that bears a reasonable relationship to the servicer’s cost of providing the service, and not otherwise prohibited by applicable law.
In a related vein, a December 2013 settlement between the CFPB, state authorities, and a servicer provided that “[a]ny force-placed insurance policy must be purchased for a commercially reasonable price.”
Accordingly, if a servicer fails to comply with the prescribed procedures before force-placing insurance, inflates the charge to the borrower above the actual cost, or assesses a charge that compares unfavorably with market prices, it could invite CFPB enforcement.
However, the CFPB has not formally prohibited certain conflicts of interest, as the FHFA has done. A conflict of interest, such as placing insurance with an affiliate where the affiliate price for insurance is higher than the market price, could be used as evidence that the cost is excessive. However, by itself, the relationship does not yet appear to be prohibited for purposes of the laws administered by the CFPB. On the other hand, the CFPB has vigorously opposed perceived conflicts of interest in other arenas, such as private mortgage insurance, and may turn its attention to these relationships in the future.