A government study concludes that states need to collect more detailed data and implement more potent policies and procedures for lender-placed insurance.
Residential loan servicers purchase lender-placed
insurance when borrower-purchased insurance lapses due to nonpayment or the policy being canceled by the insurer.
Each year, around one to two percent of
all U.S. home loans that are outstanding are impacted by lender-placed homeowners insurance.
That is according to the report
Lender-Placed Insurance – More Robust Data Could Improve Oversight from the Government Accountability Office. The report was prepared for the Senate Subcommittee on Financial Institutions and Consumer Protection, Committee on Banking, Housing, and Urban Affairs.
Utilization of lender-placed insurance has declined since the financial crisis as foreclosure activity has slowed.
While borrowers without escrow accounts — roughly a quarter to 40 percent of all borrowers — are most impacted by the practice, those with escrow accounts are also impacted when the original insurer won’t renew a policy.
In roughly a 10th of lender-placed insurance transactions, borrowers provide proof of coverage and receive a refund.
Lender-placed insurance coverage is more expensive than traditional insurance, and justification for the higher premiums is disputed.
Insurance companies claim that the lack of
a rigorous underwriting process, as well as limited information, requires higher rates. In addition, they say properties being insured have higher risk characteristics like riskier locations along the coast and higher vacancy rates due to foreclosures.
Consumer advocates and state regulators, however, claim that the reasons cited by insurers, as well as insurers’ limited loss histories, don’t justify the degree of higher premiums. They also cite the lack of influence borrowers have over the cost of the insurance and lender commissions that are passed on to the borrower in the form of higher premiums — though insurers say that rates are approved by state regulators.
Insurers also note that commissions, which have been a standard industry practice, have been recently utilized less.
The GAO said there is
a lack of comprehensive data at the state and national levels — limiting effective oversight of the industry.
“For example, regulators lack reliable data that would allow them to evaluate the cost of LPI or the appropriateness of its use,” the report states. “The National Association of Insurance Commissioners, which helps coordinate state insurance regulation, requires insurers to annually submit state-level LPI data, but the data were incomplete and unreliable. NAIC provides guidance for the reporting of these data and shares responsibility with state regulators for reviewing and analyzing the data, but neither has developed policies and procedures sufficient for ensuring their reliability.”
The report indicated that although state and federal regulators have worked together to collect more detailed national data —
insurers have failed to provide them all of the requested information. In addition, it’s unclear whether and when the industry will start doing so.
The GAO is recommending that the
NAIC work with state insurance regulators to collect sufficient, reliable data to oversee the market. This includes working with state insurance regulators to develop and implement more robust policies and procedures for data collected annually from insurers. It also includes complete efforts to obtain more detailed national data from insurers.
