FHFA Announces Ban for Reimbursement of Expenses For Captive Reinsurance Arrangements

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On November 5, 2013, the Federal Housing Finance Agency (FHFA) announced that Fannie Mae and Freddie Mac (the GSEs) will no longer reimburse their participating servicers for expenses arising out of captive reinsurance arrangements. Captive reinsurance occurs when the servicer purchases a lender-placed policy from the insurer and then issues reinsurance to the insurer through a subsidiary or affiliate. This past March, the FHFA proposed a ban on certain force-placed insurance practices, citing potential losses, as well as litigation and reputation risk.

In banning reimbursement for captive reinsurance arrangements, acting director Edward DeMarco explained that "FHFA remained concerned about the cost of lender-placed insurance for Fannie, Freddie Mac and consumers" and that the ban "is intended to reduce their costs as we consider additional measures." The FHFA announced that this directive was issued only after considering the views of a Regulatory Working Group, consisting of federal and state regulatory agencies, and key industry and consumer groups. Finally, the FHFA announced that the GSEs will provide guidance and implementation schedules to sellers and servicers in order to ensure the ban's success.