New York State is taking action to reduce the amount of time an insurer can delay deliberation on a homeowner's insurance claim in the areas affected by Hurricane Sandy.
The New York Department of Financial Services has issued new rules designed to push insurers to process home insurance claims "as quickly as possible."
HUD secretary Shaun Donovan described the move as an effort to ensure banks do not use insurance funds "to pay off outstanding loan balances."
The problem, state officials say, is that insurers can repeatedly get an extension to reaching a decision because "there is no limit on the additional 90-day extensions available to an insurer."
Under the current insurance regulations insurers must respond to a homeowner 15 business days after the claim is filed. But insurers who do not make a decision by that deadline are required to explain why and have the option to require a 90-day extension of the deadline and require that homeowners provide additional proof of loss within six days.
New York State will require insurers to report how many claims are delayed and the reasons behind these delays. "If an insurer is unable to make a claim within the allotted time" extensions are now reduced to 30 days. Plus, insurers need to send to the homeowner a letter with the reasons for the extension and the approximate time for the final decision.
"While many claims in areas affected by Storm Sandy have been closed, the Department of Financial Services is still getting many complaints from New Yorkers whose claims have not been resolved," said New York Gov. Andrew Cuomo.
The need to change insurance claim requirements has brought about a new partnership between New York State, federal regulators and mortgage servicers that operate the New York areas affected by Hurricane Sandy.
Fannie Mae and Freddie Mac recently agreed to honor Cuomo's request for new rules that accelerate the release of insurance proceeds to homeowners affected by Hurricane Sandy.
Fannie and Freddie will reduce restrictions on how banks and mortgage servicers release insurance money to homeowners.
Following the agreement the New York Department of Financial Services has sent letters to banks and mortgage services pledging "they take full advantage" of the GSEs new discretion by adjusting their policies "and immediately disburse money to New Yorkers for home repairs."
Cuomo said he expects the agreement will eliminate "much of" the red tape that has delayed recovery efforts in the past months and speed up the release of home repair money.
"Over the past three months, banks and mortgage servicers have told us that they could release much more insurance money" to Sandy victims if Fannie and Freddie "gave them the discretion to do so," said New York Superintendent of Financial Services, Benjamin Lawsky.
Earlier this month the Department of Financial Services found that banks were holding more than $200 million in insurance funds from Hurricane Sandy victims and asked Fannie and Freddie-who jointly own approximately 65% of New York mortgages-to revise their rules in order "to provide banks and mortgage servicers with even more discretion to release funds."
"Fannie and Freddie have now held up their end of the bargain. It is time for the servicers to keep their promise," Lawsky said.
So far JPMorgan Chase, Bank of America and CitiMortgage have already informed the department they will now advance 50% of the total insurance proceeds directly to all current borrowers.
JPMorgan Chase will immediately disburse an additional $5 million to $7 million to its customers. Wells Fargo, which has advanced 50% of the total insurance proceeds up front, has now pledged to advance $40,000 or 75% of the proceeds to current borrowers without requiring documentation or an inspection.
Until now Fannie and Freddie guidelines limited the amount of insurance money banks could release to homeowners "pending monitoring and completion of repairs." The GSEs would provide insurance reimbursements to borrowers who were current on their payments before the storm and have less than 80% damage to their homes.
Going forward, the GSEs have granted banks and mortgage servicers "complete and unlimited discretion" to apply to Fannie and Freddie backed loans the same practices and disburse insurance proceeds they offer to their own customers, "subject only to quality assurance programs."
According to state officials, Fannie and Freddie "stated that if banks trust New Yorkers with their own money, then they may trust New Yorkers with Fannie and Freddie's money."
The department said it plans to work with Fannie, Freddie and the Federal Housing Finance Agency to "encourage banks to release even more money to homeowners."
The state requires "immediate unmonitored disbursement of an amount equal to at least 30% of the value of the equity a borrower has in the home" based on the appraisal value at origination minus pre-storm unpaid principal balance.
An inspection is not required if the contractor used is licensed and insured and the borrower provides photographs "sufficient to demonstrate" the work has been completed. In cases when borrowers complete the repairs themselves a "reasonable inspection" applies.
In addition, since traditionally mortgage notes and insurance contracts include a dual endorsement the new practice will replace the joint check practice of issuing insurance claim checks jointly to the homeowner and the homeowner's bank or mortgage servicer that does not allow the homeowners to access the funds unless the bank endorses the check.
The state will continue to cooperate with the banks and monitor Sandy-related insurance activity. Insurers must report to DFS weekly on every claim whose decision has been extended past the initial 15-business-day period.