For those fighting to keep their homes in Florida and elsewhere, every penny counts in the monthly budget. It’s hard to write that monthly mortgage check, especially where it is a payment being made on an underwater mortgage. Homeowners already on this razor’s edge can easily get pushed into foreclosure – especially when force-placed insurance policies are placed upon property by lenders who do so without notice to homeowners and at much higher costs than standard insurance coverage. (For details on how force-placed insurance policies work, read our earlier post.)
Sure, the bank does have a right to insure a mortgage property when no insurance exists on that home. The lender, after all, has an interest in protecting the property from fire or other damage since it’s collateral on the initial home loan. It’s just not that simple, though. For one thing, there’s a problem in how pricey these force-placed insurance premiums are in these situation — and investigations have found ties between the lender and the insurance company. For another, there’s an issue on how they suddenly pop up to surprise the home owner, who is expected to pay them – in many instances homeowners do not receive advance notice.
Questions have been raised about lenders or mortgage servicers using these force-placed insurance premiums as leverage to force a home owner sitting on the fence into foreclosure. From a Bloomberg editorial quoted across the web including the Consumer Law and Policy Blog of Public Citizen’s Consumer Justice Project:
[S]ome lenders haven’t merely been unhelpful; their actions have pushed some borrowers over the foreclosure cliff. Lenders have been imposing exorbitant insurance policies on homeowners whose regular coverage lapses or is deemed insufficient. The policies, standard homeowner’s insurance or extra coverage for wind damage, say, for Florida residents, typically cost five to 10 times what owners were previously paying, tipping many into foreclosure.
It’s a lucrative business. Premiums on force-placed insurance exceeded $5.5 billion in 2010, according to the Center for Economic Justice, a group that advocates on behalf of low- income consumers. An investigation by Benjamin Lawsky, who heads New York State’s Department of Financial Services, has found nearly 15 percent of the premiums flow back to the banks.
It doesn’t end there. Lenders often get an additional cut of the profits by reinsuring the force-placed policy through the bank’s insurance subsidiary. That puts the lender in the conflicted position of requiring insurance to protect its collateral but with a financial incentive to never pay out a claim.
Both New York and California regulators have found the loss ratio on these policies — the percentage of premiums paid on claims — to be significantly lower than what insurers told the state they expected to pay out, suggesting that premiums are too high.
Consumer Finance Protection Bureau Proposal of New Federal Regulations on Force-Placed Insurance
Federal regulation is trying to move into this situation. In April 2012, the Consumer Finance Protection Bureau (CFPB) announced it would be drafting a series of proposed rules and regulations dealing with force-placed insurance and other lender / mortgage servicer hijinks.
The CFPB considers this to be the result of two big mortgage servicer problems: no transparency and no accountability. The CFPB wants to regulate force-placed insurance across the country, with final rules and regulations in place within the next two years. (The rule could be in place in final written form by January 2013, but it might take up to one year after that for it to be effective law.)
Here’s the policy outline from the CFPB (read their entire factsheet on the proposed regulations online here):
Options for Avoiding Costly “Force-Placed” Insurance. To assure that servicers do not unnecessarily charge consumers for force-placed insurance, the proposed rule that the CFPB is considering would require that:
- In cases where the servicer thinks the borrower has allowed the property insurance to lapse, the servicer would have to ask the borrower to provide proof of insurance;
- This communication would have to occur twice before the servicer charges the borrower for the insurance — at least 45 days before and again at least 15 days before;
- These notices would have to provide the consumer with a good-faith estimate of how much the force-placed insurance would cost;
- The servicer must accept from the borrower any reasonable form of confirmation that the property is insured;
- The servicer would terminate the insurance within 15 days if it receives evidence from the consumer that he has the necessary insurance and refund the force- placed insurance premiums; and
- Where the servicer has an escrow account to pay the consumer’s insurance premiums, the servicer would continue the consumers’ homeowner insurance,even if the borrower is delinquent, rather than purchasing force-placed insurance.
Larry Tolchinsky’s Tip:
The Consumer Financial Protection Bureau is doing the right thing in having its goal to be setting up governmental regulations on how mortgage lenders and mortgage servicers are treating the Florida home owner (and the American home owner). However, this fact sheet merely discusses policy, the CFPB isn’t at the stage of even writing the proposed final language of the new rules yet. That’s so long down the line that many in the industry consider the CFPB factsheet to be lightweight at best – and of no help to anyone now who needs it.
Best case scenario, any set of new mortgage servicing rules from CFPB won’t be finalized until sometime in 2014. Not a lifeline for people now, or in the next year or two.
Two things to know here. There is a possibility that you can get blindsided by force-placed insurance if you let your insurance coverage lapse on your home. There is also the chance that you can get surprised by a force-placed insurance policy set up by the mortgage servicer if the servicer or lender decides that the coverage you have on the property is not sufficient. (Imagine how big that loophole can be.)
If you are considering the real possibility that you may default on your home loan or if you are already behind in your mortgage payments, then consider the wisdom in having an experienced Florida real estate attorney by your side to fight with you in this Foreclosure Fraud environment.
If you receive a notice of force-placed insurance, then consider being proactive in dealing with the mortgage servicer. Work with your lawyer in dealing with this issue as part of an overall foreclosure defense strategy. Know your options and what’s in your legal arsenal when you’re dealing with banks and servicers and insurance companies in these Wild West Foreclosure Fraud days — state and federal law here is changing all the time, trying to keep up with all this abuse of people and the legal process.
It’s nice to learn that the federal government has opened its eyes to force-placed insurance as another avenue of abuse by lenders and mortgage servicers, but that’s not much help (read that: no help at all) to people in trouble now and over the next couple of years.
If you have questions or comments, please feel free to Chat with Larry in the comments below, at firstname.lastname@example.org or (954) 458-8655.