New York's top financial regulator is pushing other states to use the state's recent settlement with a leading provider of homeowners' insurance to distressed borrowers as a way to lower costs for consumers in other parts of the country.
In a letter to fellow insurance regulators, New York Department of Financial Services Superintendent Benjamin M. Lawsky this weekend urged them to adopt reforms "to help root out the kickback culture that has pervaded" an obscure corner of the insurance market, known as "force-placed" insurance.
The letter was reviewed by The Wall Street Journal.
Force-placed insurance is imposed on homeowners whose standard property coverage lapses, typically because the borrower is financially struggling and stops making payments.
Critics say commission and fee arrangements between banks and insurers give banks a financial incentive to arrange more-expensive homeowners' policies than necessary. Banks and the insurers have defended the fees and premiums as appropriate for the costs and risks they incur in arranging coverage for homes that often are vacant.
In mid-March, Mr. Lawsky's office reached a $14 million settlement with Assurant Inc., under which the company agreed to a ban on paying commissions and certain other fees to banks. Assurant also agreed to lower the cost of many of the policies it sells in the state, and to provide restitution to New York homeowners who meet certain criteria.
New York regulators are in "advanced discussions" with another leading force-placed insurer, QBE Insurance Group Ltd., with an aim toward a pact akin to Assurant's, a person familiar with the matter said.
QBE couldn't be immediately reached for comment.
Assurant neither admitted nor denied wrongdoing and said it was modifying practices consistent with new regulations expected to apply to all lender-placed insurers operating in the state.
Force-placed policies boomed in the wake of the housing bust, as many homeowners struggled to keep up with mortgage payments.
Borrowers may try to save money by dropping the original standard property coverage they are required to carry, only to be hit by policies with premiums that are typically at least twice as expensive as voluntary insurance.
Property insurance generally is required to secure a mortgage and protects not only the homeowner's investment but also the lender's. New York held three days of public hearings last May in which state regulators grilled Assurant, other insurers and their banking partners about their relationships.
State officials in California and Florida, meanwhile, have obtained rate reductions of as much as 35% from Assurant and QBE.
In addition, the Federal Housing Finance Agency, which regulates mortgage giants Fannie Mae and Freddie Mac, filed a notice in late March seeking public comment on a plan to ban nationally the same commissions and fees that Assurant agreed to forgo in the New York pact.
The issue is important to Fannie Mae and Freddie Mac because they pick up a large portion of the bill for unpaid insurance costs.
Officials at the housing regulator say they are setting up a joint working group with other state and federal officials to examine the issue.