Force-placed insurance remains in the crosshairs of New York financial regulators. Last week, the state’s Department of Financial Services (DFS) sent a warning letter to all New York-licensed insurance producers about force-placed insurance tracking services.

The DFS sent the letter in response to reports that insurance producers unaffiliated with insurers were offering insurance tracking services to mortgage lenders and servicers for a reduced fee or no separately identifiable charge. According to the letter, the practice’s purpose is “to induce the mortgage servicer or lender to procure force-placed insurance through the producer” upon notification that a borrower’s insurance has lapsed or otherwise terminated.

The letter states that it is intended “to provide guidance and clarification” to insurance producers about this practice. It cites New York Insurance Law Section 2324(a), which prohibits a licensed insurance producer from paying a premium rebate to an insured or giving or offering to give “any valuable consideration or inducement, not specified in the insurance policy or contract” that exceeds $25 in value. It also cites an exception for services that directly relate to the sale or servicing of a policy that a producer sold, solicited, or negotiated.

Observing that “insurance tracking services likely exceed $25 in value,” the DFS warns that any insurance producer, including an excess line broker, that is not affiliated with an insurer would violate Section 2324(a) by offering for a reduced fee or no separately identifiable charge to track insurance that the producer did not sell, solicit, or negotiate. (We note, however, that although Section 2324(a) has an express $25 exception to the prohibition against giving or offering any valuable consideration or inducement, there is no such express exception to the federal Real Estate Settlement Procedures Act's referral fee or fee-splitting prohibitions.)

Force-placed insurance has been a major focus of the DFS since it launched an investigation of the industry in 2011 and held hearings in 2012. Earlier this year, the DFS entered into settlements with the nation’s largest and second-largest force-placed insurers. Those settlements included provisions requiring the insurers to make refunds to consumers, addressing permissible loss ratios for setting premium rates, and prohibiting certain commission and reinsurance practices.

Force-placed insurance is also a focus of the Consumer Financial Protection Bureau’s new mortgage servicing rules that become effective January 10, 2014. Those rules implement provisions of Title XIV of the Dodd-Frank Act that give consumers additional rights concerning the force placement of insurance by servicers. The rules include a requirement that servicers provide advance notice and pricing information before charging borrowers for the insurance.

Ballard Spahr’s Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs). Our litigation defense experience includes representing lenders and servicers in class actions challenging their force-placed insurance practices.

The group includes the firm’s Mortgage Banking Group, which combines broad regulatory experience assisting clients in both the residential and commercial residential mortgage industry with formidable skill in litigation and depth in enforcement actions and transactions. Our attorneys, including the attorneys who joined us from the New York City litigation firm Stillman & Friedman, P.C., to form Ballard Spahr Stillman & Friedman LLP, have substantial experience in handling litigation with DFS and the New York Attorney General.

For more information, please contact CFS Practice Leader Alan S. Kaplinsky at 215.864.8544 or kaplinsky@ballardspahr.com, Mortgage Banking Practice Leader Richard J. Andreano, Jr., at 202.661.2271 or andreanor@ballardspahr.com, James A. Mitchell at 212.223.0200 x8006 or mitchellj@bssfny.com, or Marjorie J. Peerce at 212.223.0200 x8039 or peercem@bssfny.com.


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