BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | AB 1645|
|Office of Senate Floor Analyses | |
|(916) 651-1520 Fax: (916) | |
|327-4478 | |
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CONSENT
Bill No: AB 1645
Author: Dababneh (D)
Introduced:1/12/16
Vote: 21
SENATE INSURANCE COMMITTEE: 8-0, 6/22/16
AYES: Roth, Gaines, Berryhill, Glazer, Hall, Hernandez,
Mitchell, Wieckowski
NO VOTE RECORDED: Liu
ASSEMBLY FLOOR: 76-0, 4/14/16 (Consent) - See last page for
vote
SUBJECT: Mortgage guaranty insurance
SOURCE: Author
DIGEST: This bill 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 four families or less, absent that
mortgage guaranty insurer purchasing reinsurance on those
policies.
ANALYSIS:
Existing law:
1)Provides for the regulation of mortgage guaranty insurance by
the California Department of Insurance (CDI), and requires a
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certificate of authority separate from other insurance
authority in the state;
2)Defines, generally, 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
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 four families,
commercial properties, and junior liens on residential
properties designed for four 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) above to mortgage
guaranty insurance for loans for residential properties
designed for four families or less, on January 1, 2018; and
7)Authorizes a mortgage guaranty insurer to extend its coverage
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for this class of insurance beyond the established limits,
provided the excess is insured by a contract of reinsurance.
This bill 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 four families or less, absent that mortgage
guaranty insurer purchasing reinsurance on those policies.
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,
Chapter 105, Statutes of 2012), a mortgage guaranty insurer had
to limit its coverage for residential properties designed for no
more than four 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
three 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
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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 eight states enacted the reinsurance limitation and six
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 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.
FISCAL EFFECT: Appropriation: No Fiscal
Com.:NoLocal: No
SUPPORT: (Verified6/27/16)
U.S. Mortgage Insurers
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OPPOSITION: (Verified6/27/16)
None received
ARGUMENTS IN 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.
ASSEMBLY FLOOR: 76-0, 4/14/16
AYES: Achadjian, Alejo, Travis Allen, Arambula, Atkins, Baker,
Bigelow, Bloom, Bonilla, Bonta, Brough, Brown, Burke,
Calderon, Campos, Chang, Chau, Chávez, Chiu, Chu, Cooley,
Cooper, Dababneh, Dahle, Daly, Dodd, Eggman, Frazier, Beth
Gaines, Gallagher, Cristina Garcia, Eduardo Garcia, Gatto,
Gipson, Gomez, Gonzalez, Gordon, Gray, Grove, Hadley, Harper,
Roger Hernández, Holden, Jones, Jones-Sawyer, Kim, Lackey,
Linder, Lopez, Low, Maienschein, Mathis, Mayes, McCarty,
Medina, Mullin, Obernolte, O'Donnell, Olsen, Patterson, Quirk,
Ridley-Thomas, Rodriguez, Salas, Santiago, Steinorth, Mark
Stone, Thurmond, Ting, Wagner, Waldron, Weber, Wilk, Williams,
Wood, Rendon
NO VOTE RECORDED: Irwin, Levine, Melendez, Nazarian
Prepared by:Erin Ryan / INS. / (916) 651-4110
6/29/16 15:45:38
**** END ****
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