The Federal Housing Finance Agency is cracking down on certain practices related to force-placed insurance.

The regulator is essentially creating new restrictions on the insurers' relationship with banks and mortgage servicers.

The practice of banks arranging and forcing insurance policies on homeowners who have let their voluntary hazard policies lapse tends to shock borrowers. 

As a result, Ed DeMarco, current acting director of the FHFA, filed a notice Tuesday to prohibit fees and commissions paid by insurances to banks on force-placed insurance. 

"While FHFA plans a broader review of issues relating to the market for lender placed insurance, that includes receiving input from government and private sector parties, the practices that are addressed here are considered sufficiently distinct as to merit early action by the agency acting as conservator for the enterprises," DeMarco said. 

Many critics believe the fee system has provided banks with a financial incentive to arrange more expensive homeowners’ policies than necessary. 

As a result, prohibiting the fees and commissions could help lower the price of the insurance polices, since the FHFA’s move would apply to all mortgages guaranteed by Fannie Mae and Freddie Mac — roughly half of the housing market.

"New York's reforms and the findings of the extensive investigation by the Department of Financial Services continue to serve as a national model and FHFA's new proposal appears to be another step in that direction," said Andrew Cuomo, Governor of New York.

Force-placed insurance boomed in the wake of the financial crisis and, consequently, so has the government-sponsored enterprises’ expenses related to such coverage.

"In order to keep lender placed insurance costs to the enterprises as low as possible, practices that provide incentives for or do not deter higher costs should be avoided," the notice explained.

Going forward, the FHFA anticipates that the GSEs will put in place restrictions on force-placed insurance for mortgages purchased or guaranteed by the enterprises. 

Two areas of force-placed insurance the FHFA seeks to immediately limit include certain sales commissions and reinsurance activities.

However, before any restrictions take effect, the agency wants input from homeowners over the next 60 days.

After the input is received, Fannie Mae and Freddie Mac will provide aligned guidance to sellers and servicers, including implementation schedules related to force-placed insurance practices. 

"FHFA invites input from any person with views on the planned practice limitations set forth and also invites input on enhancing the transparency and consumer and investor protections related to lender placed insurance as well as regarding other practices that may operate to the detriment of the Enterprises operating in conservatorships," DeMarco concluded in the notice.

Recently, insurer Assurant settled with New York state regulators, agreeing to pay $14 million in civil penalties over force-place insurance policies.