BILL ANALYSIS
SENATE COMMITTEE ON BANKING, FINANCE,
AND INSURANCE
Senator Ronald Calderon, Chair
SB 291 (Calderon) Hearing Date: September 4, 2009
As Amended: August 24, 2009
Fiscal: Yes
Urgency: Yes
SUMMARY Modifies surplus rules and revises the regulatory
framework for Mortgage Guaranty Insurance to require that an
insurer, at least 60 days before its surplus falls below a
required minimum, notify the Insurance Commissioner of that fact
and to allow such insurer to request a waiver of the requirement
the insurer cease transacting new business; to provide for the
retention by the Commissioner of experts at the insurer's
expense to assist in the evaluation of any waiver request, and
in the conduct of a hearing on the request; includes a
transitional provision so that notices to the Insurance
Commissioner within 10 days of the bill's effective date shall
be deemed in compliance with the 60 day advance notice provision
and an urgency clause.
DIGEST
Existing law
1. Requires all insurers licensed to transact insurance in
California to file annual and quarterly financial
statements, an annual audit by a licensed certified public
accountant and such other financial information as the
Insurance Commissioner deems appropriate.
2. Authorizes the Insurance Commissioner to require any
licensed insurer to file additional financial statements,
including monthly statements, if the Insurance
Commissioner, in his or her discretion, deems it necessary
for the protection of the public.
3. Provides the Insurance Commissioner with broad authority
to examine all aspects of the financial condition of any
licensed insurer, including having financial examiners
examine the insurer's books and records on site, at the
expense of the insurer.
SB 291 (Calderon), Page 2
4. Provides the Insurance Commissioner with broad authority
to issue orders to any insurer, including orders to cease
writing new business in California, to obtain new capital
as a condition of continued writing, or other orders deemed
necessary by the Insurance Commissioner to protect the
public.
5. Authorizes the Insurance Commissioner to issue a seizure
order without a hearing and to immediately seize control of
the assets, property and operations of an insurer if the
insurer is insolvent or the continued operation of the
insurer would be hazardous to its policyholders, creditors
or to the public.
6. Defines Mortgage Guaranty Insurance as insurance against
financial loss as the result of the nonpayment of
principal, interest or other sums agreed to be paid on a
note or loan secured by a mortgage or deed of trust on real
estate.
7. Provides that mortgage guaranty insurers are not
authorized to transact any other type of insurance, and an
insurer that transacts other types of insurance is not
eligible to seek a license to transact mortgage guaranty
insurance.
8. Provides a series of specific limitations on the type of
risks a mortgage guaranty insurer can assume, as well as
limitations on the concentration of risk in relation to its
financial status that it can assume.
9. Requires a mortgage guaranty insurer to establish a
contingency reserve and hold those reserves for ten years
before releasing the assets as unrestricted surplus.
10. Prohibits a mortgage guaranty insurer from withdrawing
funds from its contingency reserves without the approval of
the Insurance Commissioner.
11. Provides that, in addition to requirements for
paid-in-capital and contingency reserves, a mortgage
guaranty insurer shall maintain additional policyholder
surplus pursuant to a formula established by statute.
12. Requires a mortgage guaranty insurer to cease writing
SB 291 (Calderon), Page 3
new business in California if it fails to meet a statutory
policyholder surplus requirements formula, even if it is
still financially healthy. The Insurance Commissioner does
not have any discretion to waive or modify this bright-line
rule.
13. Grants the Insurance Commissioner broad authority to adopt
regulations to implement the provisions of the Mortgage
Guaranty Law.
This bill
Provides the Insurance Commissioner the discretion to order a
mortgage guaranty insurer to cease writing new business if the
Insurance Commissioner determines the insurer's overall
financial condition does not support the insurer being permitted
to transact new business in California.
Specifically, SB 291:
1. Specifies that the required amount of policyholder
surplus that a mortgage guaranty insurer must maintain
shall exclude the principal amount of a loan that is in
default if the insurer has set aside a separate loss
reserve for that loan, and the reserve is equal to or
greater than the amount of surplus that would have been
required for that loan.
2. Provides that if an insurer will not maintain the
required amount of policyholders surplus, it shall cease
transacting new business until such time that its
policyholders surplus is in compliance with this act.
3. Provides that at least 60 days prior to the time the
policyholders surplus is estimated to fall below the amount
required, the insurer shall notify the Insurance
Commissioner and may request a waiver of the requirement to
cease transacting new business and related provisions.
4. If the Insurance Commissioner fails to issue an order in
response to the waiver request within 60 days after
receiving the request for a waiver, the insurer may
continue transacting new business in California until the
Commissioner issues an order.
5. Provides that the Insurance Commissioner may retain, at
SB 291 (Calderon), Page 4
the insurer's expense, any experts necessary to assist the
Commissioner in his or her evaluation of the waiver
request.
6. The insurer shall also reimburse the Insurance
Commissioner for the cost of a hearing on the waiver
request unless the insurer has expressly waived the right
to a hearing.
7. Provides that the above provisions and the companion
provisions in existing law which are not modified by this
bill are not intended to limit the Commissioner's authority
under any other provision of the Insurance Code.
8. As a post-enactment transitional provision, provides
that an insurer who notifies the Insurance Commissioner
within 10 business days following the effective date of
this section that its policyholder surplus is estimated to
fall below the amount required by this section shall be
deemed to have complied with the 60-day notice required by
subparagraph 1 of subdivision (g).
9. The Act includes an urgency clause which states its
purpose "is to provide the Insurance Commissioner with
flexibility in regulating mortgage insurers and to maintain
an active mortgage insurance market to support residential
housing sales".
COMMENTS
1. Purpose of the bill This bill will modify California law
regulating oversight of mortgage guaranty insurers to
strengthen the authority of California's elected Insurance
Commissioner to more closely monitor the safety and
soundness of this class of insurer, taking note of its
financial structure, and current market conditions,
included the impact of strengthened underwriting of
mortgage originations, so as to permit continued mortgage
guaranty insuring activity when the carrier examined is
determined to be operating as a healthy and viable going
concern. This enhanced regulatory oversight and
flexibility will replace an existing law which can force
this class of insurer to stop all writings based upon
changes in its surplus without any showing that its ability
SB 291 (Calderon), Page 5
to function as a going concern has been compromised.
2. Economic Downturn and Mortgage Sector Background Most
observers agree that the current economic downturn began in
the housing sector and will not be resolved until the
housing sector begins to recover.
An important step to arrest the volume of troubled loans
has been the introduction of significantly tightened loan
underwriting standards to boost "loan quality" and stem the
rise in troubled loans. That fundamental "sea change" in
loan originations continues as the strengthened oversight
of Fannie Mae and Freddie Mac by the Federal Housing
Finance Agency, which was established by the Housing and
Economic Recovery Act of 2008 (HERA), continues.
As a recent example of the tightened loan underwriting that
characterizes today's mortgage marketplace, on June 8th,
2009 Fannie Mae announced changes to its Selling Guide,
reporting it had:
"conducted a comprehensive review of current
underwriting and eligibility policies with a specific
focus on current market conditions, such as increased
unemployment, stock market fluctuations, and
heightened concern about fraud in the mortgage lending
process. As a result, Fannie Mae is updating several
policies as itemized below:
Age of Credit Documents
Construction-to-Permanent Financing -
Single-Closing Transaction
Credit Card Financing
IRS Form 4506-T
Home Equity Lines of Credit
HUD-1 Settlement Statement
Property Valuation Representation and
Warranty Requirements
Subordinate Financing
Tip Income
Trailing Secondary Wage Earner Income
Verbal Verification of Employment
Verification of Stocks, Bonds, Mutual
SB 291 (Calderon), Page 6
Funds, and Retirement Accounts -Reserve
Requirements
Two-Unit Eligibility Changes"
1. Mortgage Guaranty Insurance Background Mortgage guaranty
insurance functions to enable home ownership by giving
consumers, with a down payment of less than 20 percent,
access to credit markets. This important "market stimulus"
function is why attention is focused on the line at this
time.
It achieves this market stimulus function by providing
lenders with insurance against loss when the borrower has
less than 20% down. History has shown this line will go
long periods with modest losses and then incur severe
losses during real estate downturns. For this reason, in
California and elsewhere, its current regulatory framework
(which predates the 1988 adoption in California creation of
an elected Insurance Commissioner with the more aggressive
solvency monitoring tools and practices typical today)
requires a mortgage insurer to cease all writings whenever
its risk-to-capital ratio, as specified, reaches a set
figure. In California, that figure is often referred to as
25 to 1.
2. A feature of MGI is that it relies upon the cash flow
from new business in part to pay new claims. Thus, if a
company hits the "stop all writings" threshold with no
possibility of relief, this in and of itself can jeopardize
it's viability as a going concern.
3. This bill provides that if a California licensed
Mortgage Guaranty insurer is approaching this threshold, it
shall notify the Insurance Commissioner at least 60 days in
advance who can initiate a specially targetted financial
investigation to determine if the insurer's continued
operations pose a solvency hazard. If the Commissioner
determines the insurer is not at risk, the Insurance
Commissioner would be authorized to allow such a carrier to
continue writing new business, thereby supporting the
SB 291 (Calderon), Page 7
housing sector. When a waiver has been requested, if the
Insurance Commissioner does not
4. The author introduced this bill to respond to the
threat that existing law would, due to the inflexible 25 to
1 risk-to-capital surplus rule, cause a substantial portion
of the mortgage guaranty insurance market to discontinue
writing new business in California. Such a market
contraction could further hinder recovery of the California
residential real estate market, because the secondary
lending markets require mortgage guaranty insurance on any
residential loan where there is less than a 20% down
payment. With the economy in such a prolonged downturn,
and with the crash of the residential real estate market
such a substantial cause of the recession, the shock waves
of eliminating from the market buyers who do not have 20%
of the purchase price for a down payment but otherwise meet
lender requirements would hamper the recovery of the
residential real estate sector.
5. There are six mortgage guaranty insurers licensed to
conduct business and currently transacting in California,
and as a result if even one of these companies was forced
to cease writing by the current 25-to-1 surplus formula,
the market could be disrupted. If several of these
insurers were forced to cease transacting business, the
consequences could be serious for the California economy.
6. Background on the Existing Regulatory Structure The
regulatory structure of mortgage guaranty insurance was
built upon the premise that this line of insurance will be
characterized by long periods of relatively low claim
experience followed by short periods of high claims
experience. As a catastrophic line of insurance, there are
special reserving requirements, risk concentration rules,
and other features designed to prepare mortgage guaranty
insurers to weather a market downturn. In the current
economic cycle, it is not surprising that mortgage guaranty
insurers are experiencing unusually high claims experience.
The linchpin of the current statutory approach, which dates
back decades, is an inflexible minimum surplus ratio rule
SB 291 (Calderon), Page 8
that was adopted in reliance on a 1961 study that estimated
a range of "safe" risk-to-capital ratios. When this "fixed
ratio rule" was adopted, the variety of solvency regulation
tools and oversight powers differed significantly from
those available to Insurance Commissioners today since the
advent of risk-based capital rules in the late 1980's and
1990's.
In the mortgage guaranty line of insurance, "Surplus" is a
broad concept, referring to funds set aside by the insurer
in addition to required paid in capital and in addition to
the highly regulated reserves for both known and
anticipated loss payments. While California adopted the
fixed ratio for all mortgage guaranty insurers in 1982,
this standard was apparently chosen as a mid-range choice
from studies in the early 1960's that suggested that a
healthy risk to capital ratio for this industry ranged from
12.5-1 to 40-1. (Technically, California's statute is
more complex than simply adopting a 25-1 risk to capital
ratio; however, functionally, the formula approximates this
ratio, which most other states have adopted as is.)
Apart from the 1960's studies, there is no specific
documentation that a 25-1 ratio is an indispensable facet
of a sound mortgage guaranty regulatory law. In addition,
the "tool kit" available to insurance commissioners for
effectively monitoring the capital adequacy, risk, and
solvency of insurers has significantly expanded in recent
decades through the efforts of the National Association of
Insurance Commissioners. Thus, even allowing for the
information in the 1960's studies and the observed effects
of the current downturn on losses, an Insurance
Commissioner familiar with the operations of a specific
insurer stands in a different position than their
predecessors for making informed determinations about the
solvency risk that would accompany allowing a higher ratio
than currently allowed. SB 291 will empower the Insurance
Commissioner to make such an individual company
determination based on the specific risks and capital of a
particular company.
SB 291 (Calderon), Page 9
7. Support The bill's proponents note that rising
unemployment, falling home values, increasing delinquencies
and tighter credit standards are driving higher claims
rates and putting mortgage insurance companies at risk of
being forced to stop writing new business, even though
these insurers are sufficiently capitalized to meet all of
their policyholder claim obligations and could continue to
write new insurance under an objective, risk-based test.
In California and a small group of other states, statutes
governing mortgage insurers include an automatic trigger
providing that no new insurance may be written if a company
exceeds the 25:1 risk-to-capital ratio. This requirement
is inconsistent with the financial regulation of other
lines of insurance and lacks any flexibility or discretion
for a prudent regulator.
The Mortgage Insurance Companies of America (MICA) supports
SB 291 to modernize the financial regulation of mortgage
insurers to be more consistent with other regulatory
schemes that provide an objective measure of risk vs.
capital. Modernizing these statutes will allow mortgage
insurers to continue to offer insurance in California with
adequate safeguards to insure the solvency of the industry.
8. MICA makes several arguments in support of the bill. At
the general level, MICA points out that the regulation of
the property/casualty and life industries has, in recent
years, tended to move away from inflexible statutory
formulas. Tools such as risk-based capital analysis, where
the specific insurance risks on a company's books are
evaluated with respect to its particular portfolio of
investments, have become the primary methods for evaluating
a particular company's financial health.
9. MICA also argues that the portion of the bill that
specifies that fully reserved claims should not be part of
the surplus formula is consistent with similar laws in the
states where the mortgage guaranty insurers are domiciled.
In this regard, it is important to note that, while any
state that licenses an insurer has regulatory authority
over that insurer, it is the state of domicile that is the
primary enforcer of financial regulatory rules. In support
SB 291 (Calderon), Page 10
of this argument, MICA has provided the Committee with
documentation from several of the states where mortgage
guaranty insurers are domiciled establishing that the bill
proposes a rule consistent with those states.
10. The California Bankers Association and the California
Mortgage Bankers Association state they support the bill,
noting "the additional flexibility it would provide with
respect to a mortgage guaranty insurer's policyholder
surplus level will help to maintain the availability of
mortgage guaranty insurance in a residential real estate
market that has experienced a deep downturn." They
additionally state their belief this bill "is a needed
reform ? that will lessen the risk of further disruptions
in the housing market".
POSITIONS
Support
Mortgage Insurance Companies of America (MICA)
California Bankers Association
California Mortgage Bankers Association
Opposition
None received
Principal Consultant: Kenneth Cooley (916) 651-4102