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FHFA-OIG: FHFA should sue over force-placed insurance practices

Excessively priced insurance cost GSEs $158 million in 2012

{Update 1: Post updated with a statement from Congresswoman Maxine Waters}

Over the last few years, financial regulators from all over the country have questioned the cost of force-placed (or lender-placed) insurance policies. Now, the Federal Housing Finance Agency’s Office of the Inspector General is suggesting that the FHFA sue its servicers and lender-placed insurance providers because Fannie Mae and Freddie Mac have suffered “considerable financial harm” in the LPI market.

LPI exists because Fannie Mae and Freddie Mac require their borrowers to maintain hazard insurance for their homes. “The insurance safeguards the value of the homes in the event of a fire or other covered incident, thereby preserving the Enterprises’ interests in them,” the FHFA-OIG said in a report.

The GSEs’ mortgage servicers are responsible for ensuring that borrowers maintain hazard insurance on their properties. “To do so, the servicers outsource this task to specialty insurance companies that track the status of borrowers’ insurance policies,” the FHFA said.” When a provider identifies a lapse in hazard insurance, it initiates new coverage known as lender-placed insurance.”

But if a borrower’s home is foreclosed on, the GSE that owns or guarantees the borrower’s mortgage is responsible for the cost of the borrower’s unpaid LPI premiums.  “In 2012, the Enterprises paid approximately $360 million in LPI premiums,” the FHFA said.

The FHFA report states that several state financial regulators found that the LPI rates in their states were excessive. The excessive costs were driven up by “profit-sharing arrangements under which servicers were paid to steer business to LPI providers. Such arrangements often took the form of commission structures and reinsurance deals.”

As part of the FHFA-OIG’s report, it determined that two companies and their subsidiaries provide 90% of the nation’s LPI coverage. Those two companies are Assurant (AIZ) and QBE Holdings.

In 2012 and 2013, the states of New York, Florida and California accused Assurant and QBE of charging excessive LPI rates and began to enter into consent orders to settle the claims. 

In 2013, the two companies agreed to pay $24 million to the state of New York and provide restitution to the affected borrowers. In Florida and California, the companies were forced to lower their rates after the states found that the LPI rates did not comply with state law.

Additionally, borrowers began filing class-action lawsuits against the LPI providers over the excessive rates.

From the OIG report:

For example, Wells Fargo and QBE settled with a class of Florida borrowers for $19 million in May 2013. They agreed to reimburse or credit affected borrowers 25% of any LPI premium they assessed.

In September 2013, JPMorgan Chase and Assurant settled with a nationwide class of borrowers for $300 million. The defendants agreed to reimburse or credit affected borrowers 12.5% of any LPI premium they assessed.

Finally, in February 2014, Citibank and a class of borrowers agreed to a $95 million settlement in which Citibank would also refund 12.5% of the LPI premiums it billed to borrowers.

The FHFA-OIG estimates that those additional fees cost the GSEs $158 million in 2012 alone.

The FHFA itself issued directives in November 2013 to attempt to mitigate those excessive costs when the FHFA directed Fannie and Freddie to restrict the fees and commissions paid by insurers to servicers LPI.

Subsequently, the FHFA-OIG investigated the impact of the LPI costs and has now recommended that the FHFA “assess the merits of litigation by the Enterprises against their servicers and LPI providers to remedy potential damages caused by past abuses in the LPI market and, then, take appropriate action in this regard.”

The OIG reports states that the GSEs have suffered damages from the excessive rates and believes that litigation could result in financial restitution for the GSEs.

“We believe that the Enterprises may be able to benefit from LPI-related litigation,” the OIG report states. “As noted above, several state insurance regulators have documented abusive practices by some servicers and LPI providers. Consequently, these state regulators required LPI providers to substantially lower their premiums.

“Further, in some cases, regulators and LPI providers have mutually agreed to provide restitution to affected borrowers, implying that the borrowers were financially harmed by potentially collusive industry practices. As large consumers of LPI, the Enterprises have likely sustained similar financial harm as a result of these practices.”

Using previous lawsuits and actions from New York, Florida and California as a guide, the OIG believes that similar litigation “could result in financial recoveries for the Enterprises.”

The OIG’s report noted that the FHFA’s general counsel has not yet considered lawsuits over the LPI rates. “An official from that office said that it had not yet done so, citing competing priorities, such as finalizing pending legal claims,” the OIG report stated. “The official said, however, that FHFA’s Office of General Counsel would consider undertaking such an assessment.”

The OIG stated that it believes that “FHFA—as the Enterprises’ conservator—has a responsibility to conduct such an assessment because the failure to do so could result in potentially forgoing significant financial recoveries.”

The OIG's recommendation of litigation was hailed by Congresswoman Maxine Waters (D-California), ranking member of the Financial Services Committee. In a statement, Waters said that she "applauded" the OIG for investigating the issue.

"I now encourage the FHFA to follow-up on the IG’s recommendation to assess the appropriateness of litigation against servicers and insurers over practices related to force-placed insurance," Waters said. "Given the enormity of these overpayments, the FHFA should take steps to hold any and all wrongdoers accountable.”

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