NEW YORK -- An insurance company with close financial ties to JPMorgan Chase agreed Thursday to pay a $14 million fine to New York's top financial regulator to settle allegations that it grossly over-billed distressed homeowners who were forced to buy its policies. The agreement, known as a consent order, also requires the company, Assurant, to compensate homeowners who suffered financial harm as a result of its policies and to lower rates.
The legal agreement is the most significant regulatory action to date meant to change practices in the market for "force-placed" insurance, which homeowners and their advocates -- and now regulators -- have described as blatantly abusive.
"This is the first major move to end all of these practices and we hope it will become a nationwide trend," said Benjamin Lawsky, the superintendent of the New York Department of Financial Services, which oversees insurance companies and state-chartered banks. "Prices should not be pushing up and up, pushing borrowers over the foreclosure cliff."
Practically everyone who has a mortgage must carry home insurance. If not, the company or bank that services the mortgage will buy a policy on the homeowner's behalf and send the bill to the homeowner. This is done to protect the "investor" that actually owns the loan. But rather than an arms-length transaction, with banks purchasing the most affordable policy, they instead often purchases very expensive policies sold by insurers with close financial ties. This arrangement has pushed premiums into the stratosphere. Some policies cost 10 times the price of traditional insurance, and in some cases have been imposed on borrowers who do not require insurance.
Costly premiums have meant big profits for the industry, and for its banking parkers. Through a complex arrangement, banks have managed to put themselves on both sides of these transactions, purchasing policies with an inflated premium on behalf of homeowners, then reaping 75 percent of those gains back through a reinsurance agreement. For example, JPMorgan Chase has made $600 million since 2006 by taking 75 percent of the profits from the business it gave Assurant, according to a press release that accompanied the consent order.
Ultimately, either the homeowner or the investor, including entities like Fannie Mae and Freddie Mac, end up paying the cost of the premiums.
“The force-placed insurance industry has for too long been plagued by an intricate web of relationships between insurers and banks that pushed distressed families over the foreclosure cliff,” said New York Gov. Andrew Cuomo in a statement accompanying the announcement of the settlement. “Today’s agreement starts us on the road to reform, which will clean up this industry and truly protect working people.”
In a statement, Gene Mergelmeyer, Assurant's chief executive, did not directly address the ongoing controversy over force-placed mortgage insurance. “[W]e look forward to filing our next generation lender-placed product as we continue to meet the needs of our clients and customers in New York with outstanding service and support," he said.
JPMorgan Chase did not immediately respond to requests for comment.
The Consumer Financial Protection Bureau is also investigating the industry, though it has not announced any findings. Last year, Assurant agreed to reduce premiums as part of a deal with the California Department of Insurance.
Read the consent order below: