A New York State investigation into banks and mortgage servicers could put an end to the sizable premiums that they take from homeowners through a controversial policy known as force- or lender-placed insurance, the New York Times reported.
Banks and mortgage providers regularly impose this insurance on borrowers who let their homeowners’ insurance lapse, and can typically collect premiums of between two to 10 times higher than standard plans, even though the coverage is more limited. The investigation – carried out by the New York State Department of Financial Services – reveals that these policies encourage reverse competition and thus drive prices up.
Force-placed insurers do not compete by touting attractive rates; instead, they offer lenders commissions, expense payments, and profit-sharing arrangements, which drive premiums up instead of down.
“The entity selecting the insurance company is not paying the premium,” J. Robert Hunter, the director of insurance for the Consumer Federation of America, told the Times. “So they pick the one that gives the biggest kickback.”
The foreclosure crisis brought the cost of force-placed insurance to the limelight, as distressed homeowners took an additional toll from the policies’ large premiums.
“It was driving people into foreclosure and preventing people already in foreclosure from getting loan modifications,” Justin Haines, the director of the foreclosure prevention unit at Bronx Legal Services, told the Times.
Last month, New York regulators announced plans to end force-placed insurance, beginning with a settlement with Assurant, a large national force-placed insurer. [NYT] –Hiten Samtani