Few of the restrictions in the proposed attorneys generals' settlement of mortgage servicing practices are as absolute as the prohibition of profiting from force-placed insurance.
Under the settlement's proposed terms, banks and other mortgage servicers are forbidden from placing policies with an affiliate or accepting "commissions," "referral fees," "kickbacks" or "anything of value" in relation to force-placed policies. Moreover, it would require servicers to attempt to maintain delinquent borrowers' existing policies, rather than replacing them with more expensive ones.
The Mortgage Bankers Association and the four largest servicers either declined to speak with American Banker for this article or did not return phone calls. But investor and borrower advocates said that, if the provisions in the attorneys general settlement survive, they would upend a basic component of the servicing business. (American Banker is a sister publication to National Mortgage News.)
Though banks do not report how much they collect from such payments, a cursory review of force-placed insurers' financials suggests that the business brings servicers hundreds of millions of dollars every year. Combined with the servicing settlement's more general restrictions on marking up default- and foreclosure-related services, the proposal threatens a high-margin source of servicing income.
"This overturns long-standing industry practice," said Diane Thompson, of counsel for the National Consumer Law Center. "I think the [banking] industry will fight as hard as it can against oversight and enforceability on this."
Historically an overlooked niche in the mortgage servicing industry, force-placed insurance has become both prevalent and controversial because of the unprecedented stress homeowners faced after the housing collapse. Banks purchase force-placed policies when mortgage borrowers don't live up to their obligation to maintain insurance on their property. Homeowners then must pay back the servicer for the premiums it advanced the insurer, often at multiples of what a voluntarily purchased policy would run.
Though part of the extra expense can be explained by the higher risks associated with insuring the homes of delinquent borrowers, force-placed policies generate profit margins unheard of elsewhere in the insurance industry — even after accounting for the generous commissions and other payments that servicers demand. Force-placed policies are reviled by consumer advocates for pushing already-struggling borrowers toward foreclosure, and their costs have also drawn criticism from mortgage investors who end up paying for them when borrowers default.
