[May 28, 2013]

Increased Competition, Market-Driven Pricing and Greater Transparency Required in Lender-Placed Insurance Market

Breckenridge Insurance Group, parent company of lender-placed insurer OSC, has submitted its official response to the Federal Housing Finance Agency's (FHFA) call for public input notice 2013-N-05: Lender Placed Insurance, Terms and Conditions.

The lender-placed insurance (LPI (News - Alert)) market has recently come under scrutiny over allegations of conflicts of interest and inappropriate business practices among some major mortgage lenders, servicers and insurance providers.

While significant attention has been paid to the improper commission payments between insurers and servicers and certain reinsurance practices, the LPI market suffers from a number of serious systemic limitations, chief among which are:

• A lack of competition;
• Overly inflated premiums;
• Poor availability of information, inhibiting tracking of data such as premiums, claims, refunds, deductibles and other variables used to monitor rates and set policy.

Independent investigations have identified situations of "reverse competition" in the LPI market, which have led directly to higher premiums, the cost of which is largely shouldered by the Government Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac. Taken together, these issues cost the GSEs, taxpayers and homeowners more than $150 million annually.

In March 2013, the FHFA announced its intent to end a number f the sales commissions and reinsurance activities that represent conflicts of interest between lenders/servicers and the GSEs. Breckenridge supports this decision but believes that more needs to be done to ensure the market functions in the interest of all parties, including homeowners, taxpayers and the GSEs.

"Ending inappropriate commissions and reinsurance arrangements alone will not produce the market pressures necessary to bring homeowners and taxpayers the saving they deserve," said Tracey Carragher, CEO of Breckenridge Insurance Group. "We believe the solution for the LPI industry includes increased competition, greater transparency and allowing the GSEs to exercise control over their own portfolios."

At present, with two providers controlling the vast majority of premiums, options for LPI consumers are severely curtailed. Increased competition would lead to enhanced transparency as end users and objective servicers would be better able to evaluate alternative coverage options and pricing packages. These data would help these groups exert pressure on providers and incumbent servicers to offer a product that is cost-effective for GSEs and in the best interest of the consumer.

A more competitive marketplace would immediately benefit the GSEs, the homeowners whose mortgages they own, as well as taxpayers. It would also positively influence the broader marketplace, as market forces will help correct any misalignment between premium rates and actual claim/loss ratios.

In March 2012, Fannie Mae issued a request for proposal (RFP) that sought recommendations to solve many of the issues listed above. In response, Breckenridge/OSC identified an approach that increased competition and eliminated conflicts of interest, providing cost savings directly to Fannie Mae, taxpayers and homeowners. The proposal is scalable to Freddie Mac and requires no changes to existing tracking relationships among the servicing community.

In a full and open competition, Fannie Mae selected the Breckenridge/OSC proposal over 11 others, scoring it at 96% in its evaluation criteria - 11 and 18 points, respectively, higher than the second and third place offerings. With the FHFA's support, Breckenridge/OSC stands ready to continue with the implementation of these cost savings and pursue a broad and lasting solution for the LPI market.

"Empowering GSEs - with support from objective industry partners, consumer groups and the FHFA - to open the LPI market to competition creates a sustainable solution that requires minimal regulatory monitoring once implemented," added Carragher. "Breckenridge believes that an LPI framework that is in large part industry-driven is the best path toward market reform and positive outcomes for all stakeholders."

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