Fight Continues Against Federal Intrusion of Insurance Regulation

By: williamjones
May 1, 2013

By: John Prible, Jen McPhillips

Opponents of the Big “I” on Capitol Hill have temporarily paused their direct attacks on state regulation of insurance through the Optional Federal Charter (OFC) proposal because of the impact of the legislative/regulatory response to the financial markets crisis of 2009 and the perceived lack of interest on Capitol Hill. However, the implementation of the Dodd Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), coupled with an Administration that has expressed an activist platform regarding the financial services industry, means that the threat of federal incursion into the insurance market is as real as ever.

One of the most important components of Dodd-Frank related to insurance was the establishment of the Federal Insurance Office (FIO), which by law is an informational office without any regulatory authority. In its informational capacity, FIO is required to produce a study on ways to “Modernize and Improve the US System of Insurance Regulation.” While the results of this study have yet to be released and are long overdue, there is a strong possibility that the report could call for increased federal presence in insurance regulation.

The FIO’s mission also includes a greater role in international insurance matters and reporting on the access of insurance products in traditionally underserved communities, amongst other responsibilities. These broad mandates appear innocuous on paper, but the Big “I” is ever vigilant to ensure that the FIO does not experience “mission creep” and exercise power beyond its carefully defined parameters.

Dodd-Frank also established the Consumer Financial Protection Bureau (CFPB), which was one of the most controversial aspects of the law largely because of the new agency’s breadth and scope of authority. The CFPB will gain exclusive rulemaking authority over a huge range of federal consumer protection laws, and its authority extends to many financial products particularly in the housing market.

While Dodd-Frank specifically excludes traditional insurance products from any oversight or regulation by the CFPB, in early 2013 the agency announced a proposed rule meant to restrict and control force-placed insurance. Under the proposed rule, mortgage servicers’ ability to impose force-placed coverage with insurers will be limited. The mortgage servicers will need to have a “reasonable basis” to expect that a consumer lacks the needed insurance before purchasing a new policy.

Despite their lack of jurisdiction over insurance, it appears that the CFPB is attempting to regulate force-placed insurance indirectly—through the mortgage lenders that conduct business with the insurers, which do fall under their jurisdiction. The Big “I” is particularly concerned that the CFPB’s “indirect” attack may only be the first step in a greater foray into the insurance market and the Big “I” will be on guard against any CFPB encroachment on insurance regulation.

While not directly related to Dodd-Frank, the Federal Housing Finance Agency (FHFA) and the Department of Housing and Urban Development (HUD) (see sidebar) have suddenly taken an activist role on insurance-related issues. In early 2013 the FHFA, which oversees mortgage servicers Fannie Mae and Fannie Mac, announced a proposed rule prohibiting lenders that do business with Fannie and Freddie from paying commissions or fees to insurers writing force-placed business on their loans. Similar to the CFPB rule regarding force-placed insurance, it is interesting to note that the FHFA did not try to directly regulate the practices of the insurer, but rather the mortgage lender doing business with the insurer—of which the FHFA has jurisdiction over.

These are all examples of federal agencies with their eyes on insurance. On their own most of these agencies and their actions will not likely undermine the state insurance regulatory system; however, collectively they demonstrate that the Big “I” and other supporters of state regulation must be ever vigilant in order to protect the state system from federal threats, whether legislative or regulatory.

John Prible is Big “I” vice president of federal government affairs. Jen McPhillips is Big “I” senior director of federal government affairs.

HUD Exceeds Reach in Disparate Impact Rule

HUD recently issued a final rule expanding the Fair Housing Act’s Discriminatory Effects Standard and how it applies to actions with discriminatory effects on minority groups.

The new rule attempts to hold the private housing market responsible for practices that result in statistically disproportionate effects on consumers based on color, religion, sex, familial status or national origin—regardless of whether there is evidence of intent to discriminate or that any individual was actually subjected to discriminatory treatment.

The new HUD rule is even more aggressive than the recent proposals by the CFPB or FHFA (see main story), as HUD has indicated that this could apply directly to insurer underwriting of homeowners insurance. This would be true even in situations where there was no intent to discriminate, and where all policyholders and applicants for insurance were subjected to the same underwriting and pricing criteria regardless of race, ethnicity or any other prohibited characteristic.

The Big “I” along with many other industry groups believe that HUD is clearly exceeding its authority in applying this rule to insurance and that the rule represents an infringement on state regulation of insurance as state regulators already address discrimination issues related to insurance.

—J.P. and J.M.