According to The Wall Street Journal (8/5/12), the Consumer Financial Protection Bureau launched an investigation into American International Group, Genworth Financial Inc., and PPH Corp., to determine whether these groups violated real-estate regulations. The bureau is reportedly investigating whether the companies violated laws by paying banks in exchange for business.
Homebuyers who purchase a home with a down payment of less than 20 percent must usually purchase mortgage insurance, to protect the lender in case the borrower defaults on the mortgage. All companies under investigation have said they believe they comply with the appropriate laws.
Some states are now concerned about force-placed insurance practices, with at least three saying they may launch an investigation into the situation. Force-placed insurance pertains to homeowner's insurance - also known as property insurance. Bloomberg (8/10/12) reports that Florida, Kentucky and Louisiana have all expressed concern that rates could be too high and the force-placed insurance market is dominated by only two businesses.
Force-placed insurance protects lenders when homeowners allow their homeowner's insurance policies to lapse. According to Kevin McCarty, Florida's insurance commissioner (in Bloomberg), Assurant Inc. and QBE Insurance Group Ltd. control approximately 90 percent of the market. Premiums from force-placed insurance jumped from $1.5 billion in 2004 to $5.5 billion in 2010, with insurers paying out as little as 25 cents for every dollar they collect.
Force-placed insurance, while necessary in some situations, can be not only frustrating but financially hazardous to home owners. Paul Sullivan, writing for The New York Times (8/17/12), notes that it took him months to get force-placed flood insurance off his condominium, even though he had sufficient flood coverage. Worse, because force-placed insurance can be expensive, it can push financially strapped homeowners into foreclosure.
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Lawsuits filed against force-placed insurance companies allege the companies artificially inflate premiums by up to 10 times that of traditional homeowners' insurance. Furthermore, they allege that despite the increased costs, force-placed insurance typically has inferior coverage.