Force-placed insurance
Maintaining a property insurance policy is one of the most common conditions imposed upon anyone who borrows money to purchase a house.[14] If a borrower allows such a policy to lapse, US lenders will purchase force-placed insurance for the property owner (also called lender-placed insurance, or collateral protection insurance)[15] The use of force-placed insurance by lenders is an ongoing practice that, in the wake of the financial crisis, has become increasingly common,[16][17][18] being cited by many experts as the cause of foreclosures themselves.[19] The coverage prevents gaps in insurance, which is required by the terms of most mortgages. The financial industry justifies higher premium costs of force-placed insurance policies because of the heightened insurance risk of borrowers who aren't paying for their own insurance.[20] Opponents of the product consistently provide statistics in opposition to these statements,[21][22] citing kickback payouts and loss ratios that are much lower than the rest of the insurance industry.[23]
Force-placed insurance policies fell under regulatory scrutiny when the New York State Department of Financial Services (DFS) launched an investigation into the lender-placed insurance industry that has so far led to settlements with QBE and Assurant[20][24][25] Although testimony in these hearings discussed "reverse competition" and kickbacks from Assurant to its banking clients,[26][27] In response to the settlement, DFS Superintendent Benjamin Lawsky stated, "Prices should not be pushing up and up, pushing borrowers over the foreclosure cliff."[28]
In January 2013, the Consumer Financial Protection Bureau issued new mortgage servicing rules that ensures borrowers are warned in advance of force-placed insurance's cost and prevent banks from force-placing policies on many escrowed loans. “All consumers will receive protections before a servicer may impose a charge for a force-placed insurance,” an agency spokeswoman wrote.[29] In October 2012, QBE and California agreed to a rate reduction for lender-placed insurance, with an average savings to policyholders of $577 annually.[30]
The Federal Housing Finance Agency, which oversees Fannie Mae, Freddie Mac, and the federal home loan banks, has looked into the relationships between force-placed insurers and their clients,[31] determining the relationships to be fraudulent and banning any future service kickbacks.[32] In addition, the Florida Office of Insurance Regulation is looking into the practice.[33]
