BILL ANALYSIS Ó
SENATE COMMITTEE ON INSURANCE
Senator Richard Roth, Chair
2015 - 2016 Regular
Bill No: AB 1645 Hearing Date: June 22,
2016
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|Author: |Dababneh |
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|Version: |January 12, 2016 |
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|Urgency: |No |Fiscal: |No |
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|Consultant:|Erin Ryan |
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Subject: Mortgage guaranty insurance
SUMMARY Prevents the automatic re-enactment of a restriction on the
amount of mortgage guaranty insurance that a mortgage guaranty
insurer may write on residential property designed for occupancy
of 4 families or less, absent that mortgage guaranty insurer
purchasing reinsurance on those policies.
DIGEST
Existing law
1. Provides for the regulation of mortgage guaranty insurance by
the California Department of Insurance (CDI), and requires a
certificate of authority separate from other insurance authority
in the state;
2. Generally defines mortgage guaranty insurance as insurance
against loss as a result of nonpayment of a real estate loan;
3. Requires mortgage guaranty insurers to have paid-in capital of
at least $1 million and paid-in surplus of at least $1 million;
4. Requires mortgage guaranty insurers to also establish a
contingency reserve for the protection of policyholders against
the effect of adverse economic cycles, as specified;
5. Requires a mortgage guaranty insurer to limit its coverage, for
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the class of insurance that insures against financial loss by
reason of nonpayment of principal, interest, and other sums
under any evidence of indebtedness secured by a mortgage, deed
of trust, or other instrument constituting a first lien or
charge on a residential building or a condominium unit or
buildings designed for occupancy by more than 4 families,
commercial properties, and junior liens on residential
properties designed for 4 or fewer families to no more than a
net of 30% at risk of the entire indebtedness to the insured, or
a mortgage guaranty insurer may elect to pay the entire
indebtedness to the insured and acquire title to the authorized
real estate security, as specified;
6. Reapplies the same limit of 30% in #5 to mortgage guaranty
insurance for loans for residential properties designed for 4
families or less, on January 1, 2018;
7. Authorizes a mortgage guaranty insurer to extend its coverage
for this class of insurance beyond the established limits,
provided the excess is insured by a contract of reinsurance
This bill
1. Prevents the automatic re-enactment of a restriction on the
amount of mortgage guaranty insurance that a mortgage
guaranty insurer may write on residential property designed
for occupancy of 4 families or less, absent that mortgage
guaranty insurer purchasing reinsurance on those policies.
COMMENTS
1. Purpose of the bill To permanently repeal a cap on the
level of risk a mortgage guaranty insurer may retain on a
mortgage covering residential properties up to four units
without reinsuring that risk.
2. Background Mortgage guaranty insurers underwrite insurance
policies which compensate lender or investor losses due to
the default of a mortgage loan. Prior to the enactment of SB
1450 (Calderon, Ch. 105, Statutes of 2012), a mortgage
guaranty insurer had to limit its coverage for residential
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properties designed for no more than 4 families to no more
than a net of 30% of risk of the entire indebtedness to the
insurer. A 30% limit for properties designed for more than
4 families and industrial or commercial buildings and a 20%
limit on junior liens were not changed by the 2012
legislation. In all categories, mortgage insurers were (and
in the other categories still are) allowed to extend the
coverage beyond the limit provided the excess was reinsured
through another insurance company. The 2012 legislation
included a sunset of December 31, 2017 to ensure that there
were no unintended consequences of repealing the limit for
single family residential properties.
The 30% cap was originally adopted in an effort to
accomplish 3 things: attract new capital to the mortgage
guaranty insurance market, spread the risk to non-real
estate based insurers, and obtain underwriting discipline by
virtue of the third-party reinsurer assuming financial risk.
This hoped-for market never materialized, however, and
mortgage guaranty insurers were left with the prospect of
not continuing to write this insurance for borrowers (often
first-time borrowers who could not afford the home without
an insured loan), or reinsuring with an affiliate of a
competitor. While many mortgage guaranty insurers did this
for a time, most companies found it distasteful to have to
do business, including sharing financial information, with
competitors. As a result, many insurers simply established
their own captive affiliates for the purpose of reinsuring
this risk.
Only 8 states enacted the reinsurance limitation and 6 have
now repealed it (including California subject to a sunset
clause). The National Association of Insurance Commissioners
Mortgage Guaranty Insurance Working Group is in the process
of re-writing its Mortgage Guaranty Insurance Model Act and
has removed the requirement for mandatory reinsurance from
the latest draft. The revised Model Act draft would require
a mortgage guaranty insurance company to retain at least
twenty-five percent (25%) of its risk in force on either a
first loss or quota share basis, if any portion of the risk
in force is ceded to one or more reinsurers, unless a lesser
retention is approved in writing by the state insurance
commissioner. It also would expressly prohibit a mortgage
guaranty insurance company from entering into captive
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reinsurance arrangements which involve the direct or
indirect ceding of any portion of its insurance risks or
obligations to a reinsurer owned or controlled by the
insured or from entering into any new reinsurance
arrangements with any affiliate unless it has obtained prior
written approval by its state's insurance commissioner.
3. Support According to the author, prior law required
mortgage guaranty insurers to acquire reinsurance that did
not improve the insurer's risk profile, was costly because
the mortgage guaranty insurer must capitalize an affiliated
reinsurer to meet this misguided requirement, and resulted
in unnecessary regulatory costs for both the CDI and the
insurer. According to U.S. Mortgage Insurers, AB 1645 will
eliminate the unnecessary and burdensome restrictions on
retained risk and reinsurance, and allow mortgage guaranty
insurers to have more capital available to pay claims rather
than administrative overhead.
4. Opposition None received.
5. Prior and Related Legislation SB 1450 (Calderon) Chapter
105, Statutes of 2012, until January 1, 2018, eliminated
requirements that limit the percentage of coverage a
mortgage guaranty insurer may provide for the class of
insurance that insures against financial loss by reason of
nonpayment of principal, interest, and other sums under any
evidence of indebtedness secured by a mortgage, deed of
trust, or other instrument constituting a first lien or
charge on a residential building or a condominium unit or
buildings designed for occupancy by not more than four
families.
POSITIONS
Support
U.S. Mortgage Insurers
Oppose
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None received
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