With its May 30, 2013 announcement, the hard-charging New York Department of Financial Services (DFS) has now obtained settlements from 100 percent of the New York lender-placed insurance market that will radically alter a number of practices, many of which were largely a thing of the past.
Under the DFS deal, lender-placed insurers:
- May not insure mortgaged property serviced by a bank or servicer affiliated with the insurers.
- May not pay commissions to a bank or servicer or a person or entity affiliated with a bank or servicer on policies obtained by the servicer.
- May not reinsure policies with a person or entity affiliated with the banks or servicer that obtained the policies.
- May not pay contingent commissions based on underwriting profitability or loss ratios.
- May not provide free or below-cost, outsourced services to banks, servicers or their affiliates.
- May not make any payments, including but not limited to the payment of expenses, to servicers, lenders, or their affiliates in connection with securing business.
DFS’s settlement with one carrier (American Modern Insurance) includes a $1 million penalty and restitution for homeowners. Four others -- Chubb, Fidelity and Deposit Company of Maryland, FinSecure – none of which had written significant volumes of force-placed insurance, who were not alleged or found to have engaged in the alleged arrangements identified with respect to other companies – voluntary agreed to sign proactive codes of conduct implementing New York’s “reforms.”
Much like the CFPB’s actions with respect to captive reinsurance in the private mortgage insurance market, the DFS action likely kills off the practice by some lenders and servicers of reinsuring an insurance product with historically lower loss ratios.