FHFA Sets Sights on More Lender-Placed Insurance Reform

Fannie Mae and Freddie Mac just got done with one round of lender-placed insurance reform, but more lies ahead, according to the Federal Housing Finance Agency's strategic plan.

Lender-placed insurance evaluations and "certain features or practices associated with lender-placed insurance policies that have been the subject of documented abuse and overcharging" are examples of issues on which the FHFA and the enterprises will continue to focus in 2014.

An FHFA spokeswoman had no immediate comment at deadline on what it specifically will focus on, but odds are it will shift the balance between consumer and business interests back toward consumers.

"Director Watt when he was sworn in said that one of his areas of great interest is consumer protection, so I would expect he is going to take a look at this area and probably do more of that," says Joe Pigg, vice president and senior counsel at the American Bankers Association in Washington, D.C.

The lender-servicer placement of insurance on borrowers who fail to maintain flood or hazard coverage has long been a lightning rod for consumer complaints. It is often an additional fee charged to borrowers already struggling to pay their mortgages. It's on average two to four times more expensive than borrower-placed insurance because among other things, the insured party lacks control of the property. However, lender-servicers and investors say they would not be able to make or buy loans without the coverage because of the inordinate risk involved.

Some borrowers have alleged they failed to get required notification of a lapse in their coverage in time to head off the force-placement of the higher-priced coverage. In other cases, consumer advocates allege insurers have paid improper commissions to affiliated lender-servicers for the business. These concerns became most prominent when foreclosures boomed after the 2007-2008 downturn.

The most recent agency lender-placed insurance reform generally aims to protect consumers from conflicts of interests. These include insurance commissions from affiliates. The June 1 agency reform is based on an FHFA directive that seeks to weed these conflicts of interest out by requiring lenders to certify that they do not receive commissions from insurance carriers and do not use their own affiliates to provide the insurance coverage under reinsurance agreements.

The most recent round of lender-placed insurance reform at Fannie Mae and Freddie Mac marked a shift from a more radical plan that OSC, an insurance and technology services subsidiary of the Irving, Texas-based Breckenridge Insurance Group, previously drew up in response to a Fannie Mae lender-placed insurance reform request-for-proposal.

Under that plan, Fannie would have taken more direct control of the lender-placed insurance process by providing coverage through a consortium of carriers that would offer discounts as high as 30% to 40% from current market rates. The industry protested the plan, saying it represented too radical a change and had the potential to interrupt the market.

The FHFA later vetoed Fannie Mae's original lender-placed insurance reform citing a need for further study, and subsequently directed Fannie and Freddie to implement the certification requirements instead.

Industry representatives, attorneys and observers have shown some minor concern about the certification requirement but find it is preferable to the original Fannie plan.

Many indicated they were aware of the regulatory concerns surrounding LPI commissions and affiliates well ahead of June 1. Citigroup, for example, "stopped accepting LPI hazard commissions on March 1, 2013" and lacks an LPI affiliate, according to a spokesman. It never accepted commissions for lender-placed flood insurance.

"There could be a few hanging on" to practices Fannie and Freddie are asking their seller-servicers to certify they do not engage in, but most are not, says Tim Rood, chairman of The Collingwood Group, a Washington, D.C.-based industry consulting firm with several prominent former regulators on its staff.

The few that remain were working to cut all ties with affiliates prior to the June 1 deadline, says Jeffrey Naimon, partner and financial services attorney at Washington, D.C.-based law firm BuckleySandler.

"They've moved to either liquidate or sell their insurance agencies that they currently have," he says. "They need to meet this requirement."

Kirk Stephens, chief compliance officer at OSC, which won the original Fannie Mae lender-placed insurance reform request for proposal,also characterizes the latest Federal Housing Finance Agency reform as primarily adding weight to previously-existing prohibitions elsewhere against conflicts-of-interest. Like Pigg, the ABA executive, he anticipates that there will be further consumer-oriented lender-placed insurance reform going forward at the government-sponsored enterprises as well.

"Fannie Mae and Freddie Mac are essentially lining up their servicing requirements with those of the FHFA and Consumer Financial Protection Bureau," he said in an e-mail response to questions about recent GSE LPI reform and where it may be headed. "Moving forward, it's going to be critical that the GSEs work with providers that understand the consumer's perspective and operate with this in mind."

The industry may be content with lender-placed insurance reform to date, but the FHFA's inspector general has criticized the agency's decision to pull back from the Fannie plan, and consumer advocates remain dissatisfied with it.

"You can't continue to allow the various kickback charges to flow through the system," Hunter says. The most recent reform at Fannie Mae and Freddie Mac "takes care of some of it, but not all of that," says J. Robert Hunter, director of insurance at the Consumer Federation of America in Washington, D.C.

There are lots of good alternatives for further and more effective force-placed insurance reform, he says. Among other things, there could be separate escrows to cover the liability. He prioritizes such approaches over efforts to improve borrower notification. Such moves are tantamount to telling borrowers, "Now can tell you more clearly we're screwing you," he says.

Though industry officials are skeptical the original Fannie Mae plan could ever make a comeback because of how radical a change to the system it makes, Hunter would still like to see it happen.

"I'm pushing for that and consumer groups are pushing for that," he says.