Ed's Blog

NY Investigates Banks "Forcing" Consumers To Buy Overpriced Mortgage Insurance

By Ed Mierzwinski
Senior Director, Federal Consumer Program

It's called force-placed insurance for a reason. Your mortgage lender buys it for you and you are forced to pay for it, even if it isn't the best deal for you. When lenders purchase a product to "benefit" consumers, they often have numerous incentives to make the more expensive, not less-expensive, choice due to what's called reverse competition. That's a bad deal for you and a bad deal for the economy, but a good deal for the kind of sordid crony capitalism that relies on kickbacks, not better products. Fortunately, the New York Department of Financial Services (both banking and insurance) and the CFPB are both taking a deep dive into the force-placed insurance mess.

In 3 days of hearings ending yesterday (video archive), New York State Department of Financial Services chief Ben Lawsky heard testimony from numerous witnesses, but most importantly, from J. Robert Hunter of the Consumer Federation of America and Birny Birnbaum of the Center for Economic Justice. Bob is an insurance actuary, former Texas insurance commissioner and former federal insurance administrator. Birny's an economist and his former associate director in Texas. There aren't very many people with their combination of independence and knowledge of the often-veiled insurance industry. From hearing coverage by Insurance Journal:

“Lenders usually use forced insurance as an opportunity to collect vast profits by charging outrageously high rates,” said Hunter, a former Texas insurance commissioner and federal insurance administrator. “Self-dealing and kickbacks are common. Lenders collect commissions through affiliated agents or brokers. They receive below-cost or free services from insurers, such as loan tracking assistance. Or they use an insurance company as a front to direct the coverage — and the profits — to their affiliated reinsurers.” Hunter told regulators that “reverse competition” is a major problem with the FPI marketplace. He said this phenomenon occurs when insurers compete for lenders’ business by providing financial incentives to the lender, which are then charged to borrowers, increasing the cost of the insurance."

The New York Times also reported on the hearing:

“I will never forget the ordeal CitiMortgage put me through,” said Mary V. Burton, a social worker from Staten Island who bought her house in 1990 with a $76,500 mortgage. Ms. Burton testified that after losing her job in 2008, she fell behind on her insurance premiums. That entitled her mortgage servicer, CitiMortgage, to force-placed a policy on her house, but it chose one that cost three times as much as the policy she had let lapse. CitiMortgage paid the premiums by taking money from her escrow account, then demanded that she replenish the account or be declared delinquent. Later, with the help of a legal-services lawyer, Ms. Burton learned that the insurer, a subsidiary of Assurant, had issued coverage for the full replacement value of her house, $187,000, instead of the lender’s stake, just $55,000, that it was contractually entitled to. “Their overpriced coverage caused me to experience a significant escrow shortage and is one of the reasons I fell so far behind,” said Ms. Burton, who is still trying to renegotiate her loan."

After listing a series of reforms, Hunter concluded:

"Finally, on behalf of millions of consumers around the nation who are being harmed today by unfair and excessive insurance rates, I urge you to use the results of your investigation of FPI abuses to expand the scope of your reform efforts to examine other types of insurance where reverse competition abuses are also rampant, such as auto FPI, credit insurance, debt cancellation products and title insurance."

The Consumer Financial Protection Bureau (CFPB) is also looking at the force-placed problem (news story). The review is part of its review of needed changes to mortgage-servicing rules (CFPB release).

As a followup to my weekend post on my US News debate on JP Morgan Chase's losing $3-5 billion bet, here's Yves Smith's post in a similar debate in the New York Times. Her title says it all: "For Starters, Reinstate Glass-Steagall."

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