New Rules Protect Consumers Against Excessive Force-Placed Insurance Fees

New mortgage servicing rules enacted by the Consumer Financial Protection Bureau go into effect January 10, 2014 to protect consumers from widespread unfair practices related to force-placed mortgage hazard insurance.  Mortgage servicers will now be prohibited from charging excessive fees on force-placed policies.

Here is an overview of two major substantive rules regarding force-placed insurance.

Excessive Fees Limitations

Since the financial crisis, the mortgage industry has reaped millions in profits from force-placing expensive insurance policies on unsuspecting borrowers when their own policies lapsed or were cancelled.  Mortgage servicers charged excessive fees for force-placing policies, oftentimes in the form of “kickback” style commissions banks earned for placing the policies that substantially inflated the premiums charged to consumers.

Under the new rules, mortgage servicers may only charge fees permitted by state insurance regulations or other bona fide and reasonable fees. A “bona fide and reasonable charge” is defined under the new regulations as a charge for “service actually performed that bears a reasonable relationship to the servicer’s cost of providing the service, and is not otherwise prohibited by applicable law.”

Exclusions and Exemptions Under the New Rules

The new rules apply to federally related mortgage loans, with only a few limited exemptions.  First, the rules only apply to hazard insurance, i.e. for losses caused by fire, wind, flood, earthquake, theft, falling objects, freezing and other similar hazards. However, flood insurance is excluded under the rules since flood insurance is already required under the Flood Disaster Protection Act of 1973.

There is also a narrow “small servicer” exemption in the regulations applicable to consumers with escrow accounts. Under the general rules, if a borrower maintains an escrow account for payment on the borrower’s own hazard policy, then servicers are prohibited from force-placing a new policy and, instead, must disburse funds out of that escrow account to timely pay the existing premiums.  However, small servicers are exempt from this duty to disburse funds from escrow, and may purchase force-placed insurance for consumers with an escrow account, as long as the new forced-place policy charged to the borrower is less than the amount the servicer would need to disburse out of the borrower’s escrow account. 

How Do I Get More Information on Force-Placed Insurance? 

If you have questions about being charged for hazard insurance by your mortgage lender, 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 the right side of this page.