Federal Regulators Seek to Place Limits on Force-Placed Homeowners Insurance

Force-placed insuranceEnforcing force-placed insurance, or lender-issued homeowners insurance, has been at the center of controversy for several years. While state commissioners have  already taken action against insurance companies and lenders involved in the practice, the federal government hasn’t outright taken action.

This week, that all changed when the Federal Housing Finance Agency (FHFA) issued guidelines that would impact fees and commissions associated with the specialized form of home insurance. By issuing the new guidelines, the government hopes to reduce insurance abuses that have left many homeowners financial broken.

Force-Placed Insurance Controversies

Force-placed insurance is a type of home insurance coverage presented by insurance companies associated with lenders that have chosen to require borrowers to insure their homes. Homeowners must carry coverage while financing their homes, but if their coverage lapses lenders have the right to impose their own coverage, often at a much higher cost.

In recent years, these lenders have come under scrutiny as homeowners began to complain that they were being forced to take on this type of home insurance, even when they have appropriately maintained their coverage. As a result, state-level officials have taken action.

In May 2012, the California Department of Financial Institutions accused some banks and insurers operating in the state of forcing homeowners to pay for force-placed insurance for their own financial benefit. As a result, American Security Insurance Co. agreed to reduce rates by 30.5 percent, or $577 annually.

Later that year, American Modern Home agreed to offer its customers a 21.3 percent rate reduction, and in February 2013, QBE Insurance agreed to reduce premiums by an average of $626 annually.

FHFA Guidelines for Forced Home Insurance

On Tuesday, the FHFA proposed its own guidelines to crack down on force-placed insurance. The agency, which oversees government-owned mortgage financial powerhouses Fannie Mae and Freddie Mac, published two proposed guidelines that would place bans on a number of fees and commissions.

The guidelines would prohibit the practice of paying commissions to insurance agents or brokers affiliated with lenders and ban certain reinsurance arrangements. If the proposals takes effect, they could cut premiums on force-placed policies by 20 percent, industry experts estimate. The guidelines follow a major settlement last week between New York-based Assurant Inc. and the state of New York.

The FHFA is asking for public and industry input on its proposed guidelines over the next 60 days. Its final decision will impact all mortgages guaranteed or backed by Fannie Mae and Freddie Mac.

(Image courtesy of renjith krishnan / FreeDigitalPhotos.net)