[Federal Register Volume 78, Number 61 (Friday, March 29, 2013)]
[Notices]
[Pages 19263-19264]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-07338]


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FEDERAL HOUSING FINANCE AGENCY

[No. 2013-N-05]


Lender Placed Insurance, Terms and Conditions

AGENCY: Federal Housing Finance Agency.

ACTION: Notice; input accepted.

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    This Notice sets forth an approach to address certain practices 
relating to lender placed insurance that the Federal Housing Finance 
Agency (FHFA) considers contrary to prudent business practice, to 
appropriate administration of Fannie Mae and Freddie Mac (the 
Enterprises) guaranteed loans, and which expose the Enterprises to 
potential losses as well as litigation and reputation risks. While FHFA 
plans a broader review of issues relating to the market for lender 
placed insurance, that includes receiving input from government and 
private sector parties, the practices that are addressed here are 
considered sufficiently distinct as to merit early action by the Agency 
acting as Conservator for the Enterprises.

Background

    The FHFA oversees the operations of Fannie Mae and Freddie Mac. The 
Enterprises are in conservatorships, and, as Conservator, FHFA has 
statutory obligations in its conduct of the conservatorships, including 
preserving and conserving assets.\1\ The Enterprises have diverse 
relationships with seller-servicers, ranging from loan originations to 
the administration of properties in default. These relationships are 
governed by their seller-servicer guides and, in certain cases, by 
individual contracts. Part of the administration by servicers of the 
interests of the Enterprises relate to the maintenance of properties.
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    \1\ The duties and authorities of the Conservator are set forth 
primarily at 12 U.S.C. 4617.
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    Lender placed (or forced place) insurance involves the imposition 
of property and casualty insurance on a property that does not have the 
coverage required by their mortgage instruments. This commonly occurs 
due to lapse of voluntary insurance coverage for non-payment of 
premium. The absence of coverage triggers notifications to borrowers 
advising them of the need to provide proof of adequate coverage and 
warning that, in the absence of this proof, insurance will be forced 
placed, possibly at higher rates and with diminished coverage.
    Protection of property values is important to homeowners, 
communities, and to the Enterprises. At the same time, provision of 
such insurance products at an appropriate cost is of concern as well. 
Reportedly, premiums for lender placed insurance are generally double 
those for voluntary insurance and, in certain instances, significantly 
higher. FHFA recognizes that some greater risks are involved with 
lender placed insurance and that lender placed insurance carriers do 
not have the opportunity to underwrite the properties they insure, 
however, the multiples involved may not reflect claims experience and 
other measures. Loss ratios for lender placed insurance are 
significantly below those for voluntary hazard insurance and some 
states already have required or have considered rate reductions of 30 
percent or more.
    The Enterprises, operating in conservatorship and supported by 
taxpayers, may be affected by such costs where a servicer pays the 
higher premiums and is unable to recoup the cost from the homeowner or 
at a foreclosure sale, and the expense is passed along to the 
Enterprise for reimbursement.
    In the wake of the financial crisis, demands for lender placed 
insurance have risen and, as a result, so have Enterprise expenses 
related to such coverage. Concerns about lender placed insurance costs, 
compensation, and practices have been raised by the National 
Association of Insurance Commissioners, state regulators, the Consumer 
Financial Protection Bureau, state attorneys general, and consumer 
organizations. Generally, the focus has centered on excessive rates and 
costs passed onto borrowers, as well as commissions and other 
compensation paid to servicers by carriers.
    In order to keep lender placed insurance costs to the Enterprises 
as low as possible, practices that provide

[[Page 19264]]

incentives for or do not deter higher costs should be avoided.

Approach to Certain Lender Placed Insurance Practices

    For mortgages that the Enterprises purchase or guarantee, FHFA 
anticipates that the Enterprises will put in place restriction on 
lender placed insurance practices enumerated below. Before any such 
restrictions take effect, FHFA seeks input from the public and 
interested parties for 60 days from the publication of this Notice. 
After considering input received, FHFA will determine what elements of 
the restrictions may or may not be maintained, amended or revised in 
its direction to the Enterprises. Four months subsequent to the receipt 
of such input, and in consultation with the Conservator, Fannie Mae and 
Freddie Mac will provide aligned guidance to sellers and servicers, 
including implementation schedules related to these particular lender 
placed insurance practices.\2\
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    \2\ Actions by the Enterprises only affect loans that they 
purchase or guarantee; their seller-servicer guides have no effect 
on practices of insurers except for dealings with the Enterprises.
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    The specific practices related to lender placed insurance that FHFA 
has determined pose risks to the Enterprises or run contrary to the 
duties of the Conservator and for which actions are specified are 
practices where there are concerns regarding conflicts between parties 
to the insurance agreement, including:
    1. Certain Sales Commissions. The Enterprises shall prohibit 
sellers and servicers from receiving, directly or indirectly, 
remuneration associated with placing coverage with or maintaining 
placement with particular insurance providers.
    2. Certain Reinsurance Activities. The Enterprises shall prohibit 
sellers and servicers from receiving, directly or indirectly, 
remuneration associated with an insurance provider ceding premiums to a 
reinsurer that is owned by, affiliated with or controlled by the 
sellers or servicer.

Input

    FHFA invites input from any person with views on the planned 
practice limitations set forth above. FHFA also invites input on 
enhancing the transparency and consumer and investor protections 
related to lender placed insurance as well as regarding other practices 
that may operate to the detriment of the Enterprises operating in 
conservatorships. Further, FHFA is interested in whether there is data 
or information that would run contrary to the intended results sought 
by FHFA. Finally, FHFA is interested in the amount of time and 
difficulties associated with altering contracts between contractors and 
Enterprise servicers as would result from the planned approach.
    FHFA will accept public input through its Office of Housing and 
Regulatory Policy (OHRP), no later than May 28, 2013, as the agency 
moves forward with its deliberations on appropriate action. 
Communications may be addressed to Federal Housing Finance Agency, 
OHRP, Constitution Center, 400 Seventh Street SW., Ninth Floor, 
Washington, DC 20024, or emailed to [email protected]. Communications 
to FHFA may be made public and posted without change on the FHFA Web 
site at http://www.fhfa.gov, and would include any personal information 
provided, such as name, address (mailing and email), and telephone 
numbers.

    Dated: March 25, 2013.
Edward J. DeMarco,
Acting Director, Federal Housing Finance Agency.
[FR Doc. 2013-07338 Filed 3-28-13; 8:45 am]
BILLING CODE 8070-01-P