Lender-placed, or “forced-place” insurance – also known as LPI – is ordered by a mortgage lender when there is a lapse on hazard insurance a borrower is required to carry. In 2012 and 2013, several state regulators found that forced-place insurance rates were excessive.
“The same regulators also found that LPI rates may have been driven up by profit-sharing arrangements under which servicers were paid to steer business to LPI providers,” the FHFA’s Office of the Inspector General reported. “Such arrangements often took the form of commission structures and reinsurance deals.”
When borrowers fail to pay LPI premiums, the cost shifts to Fannie Mae and Freddie Mac. The OIG found that Fannie and Freddie may have suffered “considerable financial harm” due to LPI overpricing. In 2012, for example, the OIG estimated that the companies lost $158 million due to excessively priced LPI premiums.
The solution, according to the OIG, may be to sue.
“We recommend that FHFA assess the merits of litigation by the Enterprises against their servicers and LPI providers to remedy potential damages caused by past abuses in the LPI market and, then, take appropriate action in this regard,” the report stated.
The FHFA has accepted the recommendation. It’s expected to complete its assessment of the merits of possible litigation in the next 12 months.
The Federal Housing Finance Agency should consider litigation over losses from lender-placed insurance, according to a report from the agency’s inspector general.