Major mortgage lenders are being sued for forcing homeowners into overpriced homeowners and hazard insurance when the borrowers own policies have lapsed. JP Morgan recently settled a force-placed insurance lawsuit for $300 million.
Force-Placed Insurance Overview
- What is force-placed insurance?
Force-placed insurance is hazard insurance a mortgage servicer obtains on behalf of a borrower. Essentially, when a borrower’s insurance policy lapses, whether due non-payment, simple error or otherwise, the mortgage lender will “force-place” a new policy on the property in order to protect its secured interest and charge the cost to the borrower. Force-placed insurance does not include flood insurance required when the property is in a special hazard flood zone.
- Problems with Force-Placed Insurance.
Force-placed insurance policies are notoriously more expensive than policies a homeowner could obtain on his or her own. The inflated premiums are largely due to excessive fees charged by the banks for securing the policies and the “kickback” commissions they receive from the insurers. In many cases, reinsurance companies, wholly owned by the banks themselves, issue the policies. Force-placed insurance also usually does not provide as good of coverage as a homeowners own policy given that they typically contain exclusions from coverage and primarily protect the lender, not the borrower.
- Consumer Harm From Force-Placed Insurance Abuse.
Lenders and mortgage services include provisions to force-place hazard policies in lending documents, but because they are often buried in the fine print homeowners can be surprised when it occurs. Furthermore, because force-placed insurance is more expensive than regular mortgage insurance, the additional cost often causes the homeowner unexpected financial strain. In the case of a homeowner who is already struggling with payments, the increased costs can push them into foreclosure.
Mortgage Lenders and Servicers Earned Record Profits From Force-Placed Insurance Abuse
Since mortgage servicers earn revenue from the fees charged to consumers on force-placed insurance, there is an incentive for servicers to look for opportunities to place such policies or even to improperly place the policies altogether. When the financial crisis erupted, billions of dollars of insurance policies were forced-placed on consumers netting mortgage giants like JP Morgan Chase millions in additional profits. JP Morgan Chase, along with Assurant, Inc., recently settled a class action lawsuit for $300 million. Legal experts expect the JP Morgan Chase settlement will have domino effect on other force-placed insurance lawsuits that are still pending against other companies including Citigroup, Wells Fargo, Bank of America and HSBC Bank.
Force-Placed Insurance Reform – New Rules Effective January 2014
To address the consumer harm stemming from force-placed insurance, Congress included in the Dodd-Frank Act new restrictions on mortgage servicers allowing the Consumer Financial Protection Bureau (CFPB) to implement new mortgage servicing regulations, which will go into effect January 10, 2014. The new regulations amend Regulation Z, which implements the Truth in Lending Act (TILA) and Regulation X, which implements the Real Estate Settlement Procedures Act of 1974 (RESPA).
Under the new rules, mortgage servicers are prohibited from automatically charging a borrower for force-placed insurance coverage. In order to force-place a policy, the mortgage servicer must: (1) have a reasonable basis to believe the borrower has failed to maintain hazard insurance required by the loan agreement; and (2) provide the borrower with at least two notices before charging a borrower for a force-placed policy. If a policy is force-placed when a borrower already has the requisite hazard insurance in place, servicers must cancel the force-placed policy and refund the consumer any premiums and fees charged for periods of overlapping coverage.
If the borrower has an escrow account for hazard insurance, then the servicer is prohibited from force-placing insurance at all and must maintain the borrower’s own homeowner insurance, even if the servicer must advance funds to the borrowers escrow account in order to cover the premiums.
The new rules also prohibit services from charging excessive fees, which has been defined under the regulations as any charges (other than those subject to state regulation as insurance charges) that are not “bona fide and reasonable.”
How Do I Get More Information on Force-Placed Insurance Lawsuits?
If you purchased hazard insurance for your home, or believe your mortgage lender forced you to purchase it for your property, contact the attorneys at Audet and Partners, LLP to determine if you are eligible for compensation. Call us at (800) 965-1461 or fill out the confidential case inquiry form on our website.