Banks Face Setback as FHFA Bans Force-Placed Commissions

The Federal Housing Finance Agency has proposed banning force-placed insurance commissions in a blow to banks and other mortgage servicers.

The regulator’s move was first reported by the Wall Street Journal. It will prevent banks servicing loans owned or insured by Fannie Mae and Freddie Mac from receiving payments from force-placed insurers. Ultimately the cost of force-placed premiums — including commissions paid to banks — is passed on to homeowners or investors, including Fannie and Freddie.

For the GSEs to end up paying for servicer commissions, which regularly run between 10-15%, runs “contrary to prudent business practice” and “expose the Enterprises to potential losses as well as litigation and reputation risks,” the agency wrote in a notice published in the federal register. “While FHFA plans a broader review of issues relating to the market for lender placed insurance, that includes receiving input from government and private sector parties, the practices that are addressed here are considered sufficiently distinct as to merit early action.”

The FHFA announcement comes less than two months after the FHFA, conservator for the government sponsored mortgage entities, told mortgage trade groups that it was killing a Fannie Mae plan to ban servicers from receiving commissions and lower force-placed costs by purchasing coverage directly from underwriters. Fannie’s proposal would have produced savings for borrowers and the GSE in excess of 30%, according to proposal documents obtained by American Banker.

The FHFA’s February decision to block Fannie’s plan was widely interpreted as a victory for banks by consumer advocates, industry sources and others. The regulator’s new move to bar commissions was thus unexpected and caught even Fannie Mae officials off guard, sources familiar with it say.

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