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New York Financial Services Superintendent Benjamin Lawsky cites "perverse incentives" in opening remarks for three-days of hearings the state regulator has scheduled to look into the operations of the force-placed insurance market.
May 17 -
Fannie Mae has delivered a second blow to standard industry practices for force-placing homeowners insurance on borrowers whose policies have lapsed.
March 15 -
The insurance regulator in the nation's largest state says underwriters are paying an insufficient amount in claims, suggests commissions paid to banks are part of the problem.
March 14 -
Fannie Mae intends to acquire coverage for uninsured borrowers through a carrier of its choosing, it announced on Tuesday. The move would "significantly reduce costs to homeowners, taxpayers, and Fannie Mae," the GSE says, but harm a profitable business for mortgage servicers.
March 6 -
A federal judge has granted approval for a Florida force-placed insurance class action to proceed against Wells Fargo and QBE Insurance. Evidence already uncovered in the case poses added peril to the defendants and other banks.
February 22 -
A New York probe has brought national attention to banks' alleged self-dealing in the sale of force-placed insurance. But the investigation is just one of many looming challenges to the practice.
January 18
New York's Department of Financial Services hammered banks over their relationships with force-placed insurers in a Friday hearing, challenging JPMorgan Chase (JPM) officials on lucrative reinsurance arrangements that the Department suggested are tantamount to kickbacks.
"Hundreds of thousands of people are going to get foreclosed on, and Chase is profiting immensely from the reinsurance," DFS Superintendent Benjamin Lawsky said to JPMorgan Chase executives on Friday. "It just doesn't smell right."
Lawsky's comments came during the second of three days of hearings into the market for force-placed insurance. Homeowners with mortgages are generally required to carry policies on their homes, which serve as collateral for mortgage loans. Banks can "force" coverage on customers who allow their policies to lapse. Critics have charges that the premiums on the force-placed policies are excessive, in part because of fees paid by insurers to banks that refer them business. New York's DFS has been investigating the force-placed industry since last year, making it the first government body with subpoena power to extensively explore the market.
JPMorgan and other mortgage servicers' reinsure the property insurance they buy on behalf of mortgage borrowers who have stopped paying for their own coverage. In JPMorgan's case, 75% of the total force-placed premiums cycle back to the bank through a reinsurance affiliate. This has raised further questions about the force-placed market's arrangements.
Executives for JPMorgan's affiliated insurance agency disputed that receiving 75% of the force-placed insurance premium revenues borrowers pay had aligned the bank's interests against homeowners. "I could see how somebody would think that," conceded Robert Segnini a Vice President of Chase Insurance Agency.
Over the last five years, Chase has received $660 million in reinsurance payments and commissions on force-placed policies, according to New York's DFS.
"Somebody's got to cover that risk, and Chase feels like it's positioned to do so," said Segnini. "The price to the customer wouldn't change."
DFS is also investigating commissions and other financial relationships between force-placed insurers and large mortgage servicers. In a Friday afternoon panel, the agency's staff grilled Bank of America (BAC) executives about its relationship with Balboa Insurance, which was a wholly owned subsidiary of the bank until its sale last year to QBE Insurance (QBE), an Australian conglomerate.
Balboa's sale provided Bank of America with financial incentives for writing more force-placed insurance and commits the bank to sending its force-placed insurance business to QBE for the next decade.
Lawsky questioned whether this exclusivity arrangement limited competition and allowed QBE to charge B of A borrowers exorbitant rates.
Both B of A and JPMorgan expressed concern at the hearing about the cost of force-placed insurance for homeowners. JPMorgan's Segnini said the bank
has approached its force-placed insurer partner, Assurant (AIZ), "to see if they would be able to pass on rate relief to the borrower."
Assurant told the bank it couldn't lower its rates. But the issue may come up again soon, because Chase intends to solicit contracting proposals from force-placed insurance providers later this year.
The cost of coverage "is going to be a huge consideration," Segnini said.
Of every hundred dollars in premiums that JPMorgan Chase borrowers pay to Assurant, the bank ends up keeping $58 in profit, DFS staff asserted. The agency suggested the bank's stake in force-placed insurance may encourage it to accept unjustifiably high prices by Assurant and to avoid filing claims on behalf of borrowers, since that would lower its reinsurer's returns.
The DFS staff also questioned the lack of competition in the industry, noting that Assurant and QBE have undertaken acquisitions that give them long-term control of 90% of the market. Further limiting competition are the companies' tendency to file identical rates in many states, Lawsky and his staff argue.
Despite the lack of competition among underwriters, the DFS questioned whether banks were truly unable to demand lower force-placed insurance premiums for customers.
"I don't understand why you can't use the market power you have to go back to Assruant and say, 'go to the state and re-file lower rates,'" said Joy Feigenbaum, DFS's executive deputy superintendent for consumer fraud.
The agency acknowledged that New York's insurance regulators bear some responsibility for tolerating high rates. Feigenbaum noted that the insurance regulator that DFS replaced has not asked insurers to justify their rates for well over a decade, allowing the insurers to manage their own prices. New rate filings might address many DFS concerns, JPMorgan's Segnini said.
"Let's do the math figure out what the loss ratio should be, re-file them with the state of New York and let's all move on," he said. "I think that's the answer."
New York's DFS is the first government agency to probe the force-placed market although others have expressed interest. During a break in the hearings on Friday, Lawsky told American Banker that the state's DFS had recently held preliminary talks with the federal Consumer Financial Protection Bureau and that the agency's staff seemed "very interested" in the force-placed insurance market.
