State, Federal Regulators Lack Adequate Data to Fully Protect Lender-Placed Insurance Customers, GAO Reports
Sep 9, 2015
As lender-placed insurance (“LPI”) has become more prevalent in the post-Financial Crisis market, its higher premiums and minimal regulatory oversight have raised concern among both regulators and consumer groups. Without more comprehensive and reliable data, state and federal regulators lack an important tool to fully evaluate LPI premium rates and industry practices to ensure that consumers are adequately protected, the U.S. Government Accountability Office (“GAO”) wrote in a report published yesterday, September 8, 2015.
To access the report, click here.
What limited information is available indicates that LPI generally affects 1 percent to 2 percent of all mortgaged properties annually and has become less prevalent since the 2007-2009 Financial Crisis as foreclosures have declined. Although used more often when borrowers without escrow accounts (about 25 percent to 40 percent of borrowers) stop paying their insurance premiums, servicers also use LPI when an insurer declines to renew a policy, the GAO explained.
LPI insurers often provide services such as tracking properties to help servicers identify those without insurance and confirming coverage. These insurers told the GAO they must refund premiums if a borrower provides evidence of coverage, which they said occurs on about 10 percent of policies.
The Federal Emergency Management Agency offers flood LPI, but industry officials said most servicers prefer private coverage because of more comprehensive coverage and lower rates, among other factors.
Also known as “force-placed” coverage, LPI premium rates are higher than rates for borrower-purchased insurance. Stakeholders disagreed about whether the difference is justified. Insurers pointed out that they provide coverage for any property in a servicer’s portfolio without a rigorous underwriting process, therefore the limited information warrants higher rates. They added that LPI properties tend to have higher risk characteristics, such as higher-risk locations (along the coast) and higher vacancy rates because of foreclosures.
However, some consumer advocates and state regulators said that the reasons cited by LPI insurers for higher rates–as well as the insurers’ limited loss histories–do not justify the magnitude of the premium differences. They also said borrowers have little influence over the price of LPI and that some insurers competed for the servicers’ business by providing commissions to the servicer that passed the costs on to the borrower through higher premium rates.
Insurers countered that that LPI premium rates are filed with and approved by state regulators, and that commissions were a standard industry practice, although their use has decreased.
The GAO pointed out that state insurance regulators have primary responsibility for overseeing LPI insurers, but federal financial regulators generally oversee the servicers that purchase LPI coverage for their portfolios. Nevertheless, the lack of comprehensive data at the state and national levels limits effective oversight of the LPI industry. For example, regulators lack reliable data that would allow them to evaluate the cost of LPI or the appropriateness of its use.
The National Association of Insurance Commissioners (“NAIC”) requires insurers to annually submit state-level LPI data, but the data has been incomplete and unreliable, according to the GAO.
The NAIC also provides guidance on data reporting and shares responsibility with state regulators for reviewing and analyzing it, but neither the organization nor individual regulators have developed policies and procedures sufficient for ensuring reliability.
State and federal regulators have coordinated to collect more detailed national data to better understand the LPI industry, but insurers failed to provide them all of the requested information. The GAO noted that whether and when they will is unknown. Without more comprehensive and reliable data, both state and federal regulators lack an important tool to fully evaluate LPI premium rates and industry practices and ensure that consumers are adequately protected, the GAO said.
The GAO report addresses: (1) the extent to which LPI is used; (2) stakeholder views on the cost of LPI; and (3) state and federal oversight of LPI.
Moving forward, the GAO recommends that the NAIC work with state insurance regulators to collect sufficient, reliable data to oversee the LPI market. This includes working with state insurance regulators to develop and implement more robust policies and procedures for LPI data collected annually from insurers and to complete efforts to obtain more detailed national data from insurers. According to the GAO, the NAIC said it would consider the recommendations as part of its ongoing work in the area.
Several years ago, insurance regulators in Florida, California, New York and Texas held public hearings to learn more about LPI products and practices. After the New York hearing on May 17, 2012, Governor Andrew M. Cuomo and then-Superintendent of Financial Services Ben Lawsky announced that lender-placed insurers operating in New York must lower the premiums they charge.
“Our hearings suggest a lack of competition, high prices and low loss ratios–all of which hurt homeowners,” Superintendent Lawsky said at the time.
Several months later, the NAIC’s Property and Casualty Insurance Committee held a joint public hearing with the Market Regulation and Consumer Affairs Committee to further discuss the use of LPI and its effect on consumers.
To view the materials and testimony from that meeting, click here.
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