December 12, 2013 / 9:22 PM / 4 years ago

U.S. Treasury wants federal oversight of mortgage insurers

WASHINGTON, Dec 12 (Reuters) - The U.S. Treasury Department’s insurance office on Thursday called for federal oversight of mortgage insurers, adding that state regulators should improve oversight of the entire industry.

The Federal Insurance Office’s report to Congress on ways to revamp U.S. insurance regulation was required by the Dodd-Frank Act of 2010 after taxpayers bailed out massive insurer American International Group during the financial crisis.

“In the short term, the U.S. system of insurance regulation can be modernized and improved by a combination of steps by the states and certain actions by the federal government,” the report said.

Unlike banks, which can have several federal regulators, U.S. insurance companies are mostly overseen at the state level. The Treasury’s insurance office, which was created by the Dodd-Frank law, is a research group, not a regulator.

AIG’s 2008 bailout brought heaps of criticism on the decentralized system of insurance regulation, including calls to establish a federal agency to oversee the industry.

State insurers have countered that AIG did have a federal regulator, the now-defunct Office of Thrift Supervision, which also failed to spot the problems that nearly destroyed the firm.

Regulators have since handed considerable oversight of AIG and Prudential Financial, another large insurer, to the U.S. Federal Reserve. They are considering doing the same with MetLife.

The insurance office’s report, which took years to compile and had been eagerly awaited by the industry, said federal regulators should not take over all oversight because so many insurance products are tailored to specific locations.

But the current hodgepodge system can be inefficient and overly complicated as insurers become more globally active, creating a role for federal officials, the report said.

For instance, the private mortgage insurance sector is so entwined with the rest of the housing finance system that it should be overseen at the federal level, the office said.

Mortgage insurance is often required for loans with low down payments to compensate lenders or investors if the borrower defaults on the loan.

The report said the federal government also could be more involved in efforts to monitor financial stability, work with other agencies to develop auto insurance policies that would apply across state lines for U.S. military personnel, and study the way personal information is used for insurance pricing.

States, it said, should develop better coordination for situations when one regulator plans to make decisions related to an insurer’s solvency.

The states should also come up with some new policies related to resolving failed insurers, monitor the impact of different rate-regulation practices and craft plans to reduce losses from natural disasters, the report said.

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