Force-placed insurance is again under attack, with the New York Department of Financial Services recently launching an inquiry into how the industry operates.
Earlier this month, DFS held three days of hearings, which, according to the opening statement of Benjamin M. Lawsky, the New York Superintendent of Financial Services, were directed at exploring various “red flags” raised by the force-placed insurance market. The red flags he identified included (1) high premiums coupled with low loss ratios, (2) lack of competition, and (3) a “close and intricate web of relationships” between banks and insurance companies that result in large commissions being paid to banks “for what appears to be little work” or large profits that revert to banks through reinsurance agreements.
Mr. Lawsky indicated that DFS’s initial investigation raised the question of whether a “perverse incentive” exists that causes banks purchasing force-placed insurance, depending on their relationships with insurers, to find more expensive coverage rather than try to keep prices down. He also described potential reforms that might result from the DFS inquiry, including banning affiliate relationships between banks and insurers and requiring a minimum loss ratio that would trigger a refund of premiums to consumers if the ratio is not met.
At the hearings, DFS heard testimony from representatives of industry and consumers. As part of its inquiry, DFS’s website invites consumers to describe their experiences with force-placed insurance by completing an online form (similar to the forms used on the Consumer Financial Protection Bureau’s consumer complaint portal).
Force-placed insurance is also a focus of the CFPB’s mortgage servicing rules proposal that is expected to be issued this summer. The proposal is intended to implement provisions of Title XIV of the Dodd-Frank Act that give consumers additional rights in connection with the force-placement of insurance by servicers, including a requirement that servicers provide advance notice and pricing information before charging borrowers for the insurance. The CFPB has indicated that it is considering proposing additional content for the advance notice beyond the Dodd-Frank Act’s required content. (See our blog post for more information on the proposal.)
Ballard Spahr’s Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs). We have defended lenders and servicers in class actions challenging their force-placed insurance practices.
The group includes the firm’s Mortgage Banking Group, which combines broad regulatory experience assisting clients in both the residential and commercial residential mortgage industry with formidable skill in litigation and depth in enforcement actions and transactions.
The Consumer Financial Services Group also produces the CFPB Monitor, a blog that focuses exclusively on important CFPB developments. To subscribe, use the link provided on the right. For more information, please contact CFS Group Practice Leader Alan S. Kaplinsky at 215.864.8544 or kaplinsky@ballardspahr.com; Mortgage Banking Practice Leader Richard J. Andreano, Jr., at 202.661.2271 or andreanor@ballardspahr.com; Fair Lending Task Force Leader Christopher J. Willis at 678.420.9436 or willisc@ballardspahr.com; or John L. Culhane, Jr., at 215.864.8535 or culhane@ballardspahr.com.
