Lenders, servicers and insurers who conduct business in New York still have to split hair to clarify force-placed insurance regulation and differences between state and federal requirements as the new servicing rules’ deadline approaches.
Responding to reports that mortgage lenders and servicers are accepting insurance tracking services from unaffiliated insurance producers, the New York Department of Financial Services said it is warning all parties involved that this practice is illegal in New York.
In a letter sent to all New York-licensed insurance producers, DFS notesthat insurance producers unaffiliated with insurers are offering insurance tracking servicesfor a reduced fee or no separately identifiable charge “to induce the mortgage servicer or lender to procure force-placed insurance through the producer” once a borrower’s insurance has lapsed or is terminated violates the New York Insurance Law, according to a Ballard Spahr consumer financial services and mortgage banking group report.
It notes that since Section 2324(a) of the law prohibits a
For example, the law offers an exception for services that “directly relate to the sale or servicing of a policy that a producer sold, solicited, or negotiated.”
According to DFS, “insurance tracking services likely exceed $25 in value,” hence any insurance producer or excess line broker that is not affiliated with an insurer but offers, for a reduced fee or unidentifiable charge, “to track insurance that the producer did not sell, solicit, or negotiate,” would violate Section 2324(a).
Ballard Spahr attorneys note however, “that although Section 2324(a) has an express $25 exception to the prohibition against giving or offering any valuable consideration or inducement,” such exception is not part of the “referral fee or fee-splitting prohibitions” included in the federal Real Estate Settlement Procedures Act.
Force-placed insurance is also a focus of the Consumer Financial Protection Bureau’s new mortgage servicing rules that become effective Jan. 10, 2014, they wrote. Therefore, lenders and servicers need to be aware of these state-federal level differences and “provisions of Title XIV of the Dodd-Frank Act that give consumers additional rights concerning the force placement of insurance by servicers,” including a requirement that servicers provide advance notice and pricing information before charging borrowers.
