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Mortgage Crisis Watch Business and legal issues affecting: loan repurchases | mortgage-backed securities | mortgage insurance

FHFA Restricts Forced-Placed Insurance Practices

We recently commented on JPMorgan Chase’s blockbuster agreement to resolve a class-action lawsuit for $300 million brought by more than a million homeowners nationwide. The dispute centered on allegations that Chase profited by collecting kickbacks from insurance companies for imposing force-placed insurance policies at excessive rates on properties that secured its loans where coverage had lapsed or where properties were underinsured. The settlement is anticipated to spark new litigation and encourage similar resolutions in several other related cases pending in the U.S. District Court for the Southern District of Florida.

In a new development announced yesterday, the Federal Housing Finance Agency (“FHFA”) is directing Fannie Mae and Freddie Mac to prohibit servicers from being reimbursed altogether for expenses associated with lender-placed insurance practices. The responsibility of the FHFA as the nation’s housing finance regulator, evidenced by its mission statement, is to “[e]nsure that the housing GSEs operate in a safe and sound manner so that they serve as a reliable source of liquidity and funding for housing finance and community investment.”

While framed as a response to consumer complaints, the FHFA’s newly imposed restrictions on GSEs regarding forced-placed insurance appear to be motivated by mounting concern that the questionable practices expose Fannie Mae and Freddie Mac to potential litigation and a further decline in reputation.

Limited Impact of New Restrictions

In the news release yesterday, Edward DeMarco, the acting head of the FHFA, did not promise that the FHFA’s new regulations would bring down prices, even though that is the intended goal. Instead, DeMarco qualified the restrictions as merely being an interim step.

While the FHFA’s directive was scant on details, it is clear that servicers will be prohibited from collecting any commissions or kickbacks from insurance carriers. Additionally, banks will not be able to use their own affiliates to place insurance coverage. Many sources that have been critical of the industry are skeptical that the FHFA’s announcement will do nothing to bring down the price of forced-place insurance policies. Industry experts have pointed out that the new restrictions have left open a gaping hole by still allowing insurers to provide value to banks that refer them business, such as providing services for free or at a reduced cost.

Banks appear to have been expecting the FHFA’s new restrictions. For instance, Chase recently announced that it discontinued commissions and ended its agreement with Assurant. States also appear to be following the FHFA’s lead. In September, the state of New York placed its own restrictions on the practices of the forced-placed insurance industry. It will be interesting to see what new steps the FHFA and other states will take to attempt to close remaining loopholes and silence critics in the industry.