New York State's Department of Financial Services has reached a settlement with the country's largest force-placed home insurer, in a deal meant to lower prices and prohibit widespread kickbacks in the industry. The agreement with Assurant Inc., one of two insurers which dominate the market, will lower insurers' profit margins and prohibit banks from receiving payments that pad the cost of insurance.

"The force-placed insurance industry has for too long been plagued by an intricate web of relationships between insurers and banks that pushed distressed families over the foreclosure cliff," said a statement from Governor Andrew M. Cuomo. "Today's agreement starts us on the road to reform, which will clean up this industry and truly protect working people."

Force-placed insurance is a type of back-up homeowners insurance intended to protect mortgage investors' stake in a financially struggling borrower's home. Mortgage servicers buy the product but do not pay for it, billing the cost to homeowners and investors.

It has become increasingly controversial in recent years as state regulators and consumer advocates have uncovered a pattern of kickbacks from insurers to the banks that are in charge of buying it. Although major banks typically perform little or no work in relation to the product, they received commissions, lucrative reinsurance contracts, and unexplained lump-sum payments for the work.

New York's Department of Financial Services played a prominent role in highlighting the questionable payments, grilling banks and insurers over their financial arrangements. In a series of hearings, Superintendent Benjamin Lawsky made a case that price gouging drove up the cost of insurance for both homeowners and investors, including the government-owned mortgage giants, Fannie Mae and Freddie Mac.

Under the settlement announced Thursday, Assurant has agreed to the following things, among others:

  • It will stop making lump sum payments and commissions to mortgage servicers who arrange for the purchase of force-placed insurance.
  • It will file new rates with the state based on a 62 percent claims-paid ratio, meaning that it will set its rates so that it pays out 62 percent of its premium revenue in claims. In recent years, the insurer's claims-paid ratio consistently remained between 20 and 30 percent.
  • It will no longer allow mortgage servicers to reinsure the insurance policies written on their own portfolios. According to the DFS, JPMorgan has earned more than $600 million since 2006 by reinsuring 75 percent of the premiums written on its portfolio.

A full version of the settlement agreement can be found here.

This story originally appeared at American Banker.

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