These  services include providing detailed insurance data to help regulators  understand insurance sales and practices; maintaining a range of  databases useful to regulators; and coordinating state regulatory efforts  by providing guidance, model laws and regulation, and information- sharing tools. The rules: prohibit servicers from charging borrowers for homeowners LPI unless  they have a reasonable basis for believing that the borrower has not  maintained homeowners insurance as required by the loan contract;  require all charges to be bona fide and reasonable (does not cover  charges subject to state regulation as the “business of insurance” and  those authorized by the Flood Disaster Protection Act);  require servicers to send two notices to borrowers before placing LPI;  specify the content of the notices with model forms; generally prohibit servicers from obtaining homeowners LPI for  borrowers with escrow accounts for the payment of hazard insurance  whose mortgage payments are more than 30 days overdue unless the  servicer is unable to disburse funds from the borrower’s escrow  account to ensure that the borrower’s hazard insurance premiums are  paid on time. Servicers and insurers said that they use the tracking  and notification systems to ensure that LPI placement is as accurate as  possible, but that they must refund premiums when the borrower provides  proof of coverage, which occurs on about 10 percent of policies. Finally,  the Federal Emergency Management Agency (FEMA) offers flood LPI  through its Mortgage Portfolio Protection Program (MPPP), but servicers  generally said that they prefer private flood LPI coverage for a number of  reasons, including more comprehensive coverage and lower premium  rates. Industry officials said that  placement rates increased as borrowers stopped paying their  homeowners or flood insurance premiums along with their mortgage  payments. By the end of this process, the insurer is generally able to confirm  borrower-purchased coverage for most of the mortgages in a servicer’s  portfolio, but servicers ultimately place new coverage on the  approximately 1 percent to 2 percent of borrowers who do not respond to  the notifications. FEMA Offers Flood LPI, but Servicers Prefer Private Coverage

LPI is also used when mandatory flood insurance policies lapse. Some Consumer Advocates and State Regulators Said Several Factors Resulted in Higher Rates and Other Practices That Harmed Consumers, but Industry Officials Disagreed

Consumer advocates said that the primary cause of higher LPI rates was  reverse competition—a market structure that drives up prices for  consumers because insurers compete for mortgage servicers’ business  rather than consumers’ business—by providing financial incentives to the  servicer. They also said that some insurers have paid commissions to  servicers or servicers’ agents and that the servicers and agents did little  work to justify them. One industry official, however, said that  commissions were a standard industry practice and that their costs were  within reasonable ranges. This limited competition, they said, could  contribute to higher premium rates. Some State and Federal Regulators Have Taken Actions Related to LPI, but Incomplete Data Limit Oversight

		State Oversight of LPI Varies

Oversight of homeowners LPI varied across selected states in terms of  requirements, reviews of LPI practices, and the rate filing process. The settlements  required the LPI insurers to refile premium rates with a permissible loss  ratio of 62 percent; to refile rates every 3 years; to annually refile any  rates that have an actual loss ratio of less than 40 percent; to have  separate rates for LPI and borrower-purchased insurance; and prohibited  certain practices, including the payment of commissions. NAIC and state  regulators are responsible for reviewing and analyzing data from insurers,  including the CIEE. Without more  comprehensive and reliable data and adequate policies and procedures  to ensure the usefulness of the data, NAIC is limited in its ability to  coordinate LPI regulation nationwide, and state and federal regulators  lack reliable data about the industry. Without more comprehensive and reliable data, state and federal  regulators are lacking an important tool to help them fully evaluate the LPI  industry and ensure that consumers are adequately protected. Recommendations for Executive Action

To help ensure that adequate data collection efforts by state insurance  regulators produce sufficient, reliable data to oversee the LPI market, we  recommend that NAIC: work with the state insurance regulators to develop and implement  more robust policies and procedures for the collection of annual data  from LPI insurers to ensure they are complete and reliable; and work with the state insurance regulators to complete efforts to obtain  more detailed national data from LPI insurers. This  report (1) describes the extent to which LPI is used, (2) discusses  stakeholder views on the cost of LPI, and (3) describes state and federal  oversight of LPI. We interviewed the same  consumer advocates, industry associations, and a selection of state  insurance regulators, insurers, and mortgage servicers to better  understand how each party is involved in LPI and the circumstances  surrounding its use. To discuss stakeholder views on the cost of LPI, we interviewed state  insurance regulators, consumer advocates, and industry officials about  their opinions on the reasons for differences in premium rates between  LPI and borrower-purchased insurance and their opinions on the effects  on consumers. However, the total number of LPI insurers  as well as the total LPI premium volume are unclear because of a lack of  comprehensive national data on the LPI industry.
Why GAO Did This Study

Mortgage servicers use LPI to protect the collateral on mortgages when borrower-purchased homeowners or flood insurance coverage lapses. The 2007-2009 financial crisis resulted in an increased prevalence of LPI. Because LPI premiums are generally higher than those for borrower-purchased coverage, state insurance regulators and consumer groups have raised concerns about costs to consumers.
This report addresses (1) the extent to which LPI is used; (2) stakeholder views on the cost of LPI; and (3) state and federal oversight of LPI. GAO examined documentation, studies, and laws and regulations related to LPI, and interviewed stakeholders including state insurance and federal financial regulators, consumer advocates, insurers, servicers, and industry associations. GAO selected interviewees based on their involvement in the LPI market and other factors to obtain a diverse range of perspectives. GAO selected the seven state insurance regulators to interview based on a number of factors including LPI premium volume and involvement in the LPI market.

What GAO Found

Mortgage servicers purchase lender-placed insurance (LPI) for mortgages whose borrower-purchased insurance coverage lapses, most often because of nonpayment by the borrower or cancellation or nonrenewal by the original insurer. The limited information available indicates that LPI generally affects 1 percent to 2 percent of all mortgaged properties annually and has become less prevalent since the 2007-2009 financial crisis as foreclosures have declined. Although used more often when borrowers without escrow accounts (about 25 percent to 40 percent of borrowers) stop paying their insurance premiums, servicers also use LPI when an insurer declines to renew a policy. LPI insurers often provide services such as tracking properties to help servicers identify those without insurance and confirming coverage. LPI insurers said they must refund premiums if a borrower provides evidence of coverage, which occurs on about 10 percent of policies. The Federal Emergency Management Agency offers flood LPI, but industry officials said most servicers prefer private coverage because of more comprehensive coverage and lower rates, among other things.
LPI premium rates are higher than rates for borrower-purchased insurance, and stakeholders disagreed about whether the difference is justified. Insurers pointed out that they provide coverage for any property in a servicer's portfolio without a rigorous underwriting process, and the limited information requires higher rates. They added that LPI properties tended to have higher risk characteristics, such as higher-risk locations (along the coast) and higher vacancy rates because of foreclosures. But some consumer advocates and state regulators said that the factors that insurers cite for higher rates, as well as the insurers' limited loss histories, do not justify the magnitude of the premium differences. They also said borrowers have little influence over the price of LPI and that some insurers competed for the servicers' business by providing commissions to the servicer that passed the costs on to the borrower through higher premium rates. Insurers, however, said that LPI premium rates were filed with and approved by state regulators and that commissions were a standard industry practice, but their use had decreased.
State insurance regulators have primary responsibility for overseeing LPI insurers, but federal financial regulators generally oversee the servicers that purchase LPI coverage for their portfolios. However, a lack of comprehensive data at the state and national levels limits effective oversight of the LPI industry. For example, regulators lack reliable data that would allow them to evaluate the cost of LPI or the appropriateness of its use. The National Association of Insurance Commissioners (NAIC), which helps coordinate state insurance regulation, requires insurers to annually submit state-level LPI data, but the data were incomplete and unreliable. NAIC provides guidance for the reporting of these data and shares responsibility with state regulators for reviewing and analyzing the data, but neither has developed policies and procedures sufficient for ensuring their reliability. State and federal regulators have coordinated to collect more detailed national data to better understand the LPI industry, but insurers failed to provide them all of the requested information, and whether and when they will is unknown. Without more comprehensive and reliable data, state and federal regulators lack an important tool to fully evaluate LPI premium rates and industry practices and ensure that consumers are adequately protected.

What GAO Recommends

GAO recommends that NAIC work with state insurance regulators to collect sufficient, reliable data to oversee the LPI market. This includes working with state insurance regulators to develop and implement more robust policies and procedures for LPI data collected annually from insurers and to complete efforts to obtain more detailed national data from insurers. NAIC said it would consider the recommendations as part of its ongoing work in the area.