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UPDATE: Reform of lender-placed insurance on hold

The Lender-Placed Insurance Working Group of the Property & Casualty Committee of the National Association of Insurance Commissioners declined to address proposed new consumer-friendly guidelines at their most recent national meeting in early August.

The Working Group had been expected to recommend sweeping new standards for the insurance industry segment. State associations would then decide whether to implement the new guidelines as regulations. Such guidelines are, on the whole, widely, if irregularly, adopted.

According to the NAIC, the Working Group has not completed its work on the new guidelines, and still expects to issue them this year.The industry’s movement to self-correct followed public, widespread difficulties in critical segments that brought to light shortcoming in LPI practices. In 2011, practices in New York led to multi-million dollar penalties against insurers and lenders and restitution for property owners. Regulators discovered cases of actual “reverse commission” wherein insurers providing the coverage had created incentives to push premiums higher, which allowed lenders and mortgage servicers to share in the profits from the higher rates, and far lower usage.

According to NAIC, lender-placed insurance is placed on a home by a bank or mortgage servicer when the homeowner does not maintain valid or sufficient insurance based on the terms of the mortgage agreement. If a homeowner’s insurance policy lapses and is not replaced, many mortgage agreements allow the lender to purchase insurance on the home and require the borrower to pay the premiums.

Following the 2008 real estate market crash, consumer groups and regulators raised concerns over the often high premiums and limited coverage provided under lender-placed insurance, as well as the perceived lack of incentives for lenders to select the best policies for the borrowers. Following a 2012 NAIC public hearing on the subject, a Working Group was formed to draft a new model law to address these issues.

The NAIC acts as a forum for the creation of model laws and regulations. Each state may or may not pass each NAIC model law or regulation. States may delete or modify certain sections if the substance of it already exists in state law. The NAIC comprises the insurance commissioners of each state, Washington D.C., and the five U.S. territories.

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