Force-Placed Homeowners Insurance Update: New Rules Applicable to Mortgage Servicers

New mortgage servicer rules were enacted by the Consumer Financial Protection Bureau (CFPB), effective January 1, 2014. The new rules amend Regulations X and Z, under the Real Estate Settlement Procedures Act and Truth in Lending Act, respectively, and create new requirements which must be followed before a mortgage servicer can legally force-place an insurance policy.

Force-placed insurance was one of the highest profit margin activities of mortgage services in past years with lenders jumping to replace a homeowners $1,500 policy with one two or three (or four) times the cost (keeping much of that premium themselves in fees and commissions). Following consumer outrage and successful class action lawsuits, the CFPB set out to regulate force-placed insurance practices in order to better protect consumers from financial harm.  The new rules are designed to make force-placed insurance a rare event, not a routine practice.  Here is a summary of the new rules mortgage services are required to follow before they can legally impose force-placed policies on homeowners.

Borrowers Must Be Warned About a Possible Force-Placed Policy:  Mortgage servicers must be able to prove on a “reasonable basis” that a borrower’s hazard insurance has in fact lapsed before the servicer can force-place a policy.  This means consumers must be warned (through written notices) at least 45 days prior to charging for a force-placed policy, with a reminder warning notice at least 30 days after the first notice.  There is then and an additional 15-day waiting period before the servicer can charge the borrower.  This gives the consumer the chance to remedy policy problems or shop for a better policy.

Borrowers Own Insurance Must be Continued if Escrow Account Exists:  If the borrower has an escrow account for hazard insurance payments, then mortgage servicers must continue the homeowners policy if it can be continued, rather than buying a forced-place policy, even if the servicer must advance funds to the borrowers escrow account in order to do so.

Refunds Required Upon Proof Insurance:  If a policy is force-placed, but the homeowner provides proof of his/her own insurance coverage, the servicer must cancel the force-placed policy and refund any and all premiums covering overlapping periods.

In addition to the procedures required before force-placing insurance, the new rules also aim to avoid the excessive fees servicers had previously imposed on consumers. While there is no specific limit under the rules, if a premium seems excessive to the borrower, consumers are likely to complain about it (and the Consumer Protection Bureau is likely to agree with them).  The new rules also address better customer service, error resolution and compliant handling policies.

How Do I Get More Information?  

If you have questions about force-placed insurance or believe your mortgage lender or servicer has unfairly force-placed a policy for you, contact the law firm of Audet & Partners, LLP to learn more about your options.  Call us at (800) 965-1461 or complete and submit our confidential inquiry form on the right side of this web page.

Source: Gaffney, Jacob, (2014, March 18); Retrieved from: http://www.housingwire.com/blogs/1-rewired/post/29344-how-to-avoid-getting-sucked-into-a-force-placed-insurance-fight;  See also the regulations on the Consumer Financial Protection Bureau website as retrieved from: http://www.consumerfinance.gov/regulations/2013-real-estate-settlement-procedures-act-regulation-x-and-truth-in-lending-act-regulation-z-mortgage-servicing-final-rules/