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An Update on Lender-Placed Insurance Guidelines


The Lender-Placed Insurance (LPI) Working Group of the Property & Casualty Committee of the National Association of Insurance Commissioners [1] (NAIC) declined to address proposed new consumer-friendly guidelines at a scheduled national meeting in early August.

Instead, after a committee meeting in September, they extended the comment period on the proposed new guidelines to October 31.

Following the extended period on comments on the redlined version of the guidelines, reforms are expected to be endorsed by the NAIC by the end of this year.

The Working Group is likely to recommend sweeping new standards for the LPI industry segment. State associations would then decide whether to implement the new guidelines as regulations. On the whole, such guidelines are widely, if irregularly, adopted.

The industry’s movement to self-correct followed public, widespread difficulties in critical segments that brought to light the 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. At that time, regulators discovered cases of actual “reverse commission” where insurers providing the coverage had created incentives to push premiums higher, allowing lenders and mortgage servicers to share in the profits from the higher rates, and far lower usage of the coverage.

According to the 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.

After 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.

The current working version of the new guidelines can be viewed here [2].

Comments should be submitted to NAIC’s Tiffany Lewis by October 31, 2018 on tnlewis@naic.org [3]

Learn more about the guidelines here:

Insuring Against Collapse [4]