For Borrowers in Trouble: “Force-Placed” InsuranceSkip to issue
§1. Does it matter if there’s an insurance escrow account?
Almost all mortgage loans require borrowers to get homeowners’ insurance (technically called ”hazard insurance”) for their property. If the borrower doesn’t keep up the insurance, the servicer is allowed to get “force-placed insurance” – so called because the servicer can choose where to buy (“place”) the new policy and “force” the borrower to pay it. Often, force-placed insurance costs more but provides less coverage than what borrowers can get themselves. Sometimes, servicers get commissions or other fees from this insurance, or the servicer may be connected with the insurance company that is being used. This extra cost may push a borrower into deeper trouble. During the mortgage crisis, some servicers wrongly charged borrowers for force-placed insurance even though the borrower’s own policy was still in effect. CFPB is proposing several new limits on force-placed insurance. For borrowers who have an escrow account for insurance, CFPB wants to prevent the servicer from getting force-placed insurance in the first place. CFPB isn’t sure what to do when there is no escrow account.
What this means for consumers. Servicers are already required to renew the borrower’s policy promptly from funds in an insurance escrow account. If there isn’t enough in the account for the premium, the servicer must make up the difference. (The servicer gets the money back as the borrower continues to make regular payments.) So what’s the problem? Borrowers in trouble often make late or incomplete payments. Now, if the borrower is more than 30 days late on his/her mortgage payments and there’s not enough in the escrow account, the servicer does not have to advance the money to renew the borrower’s own policy. Instead, it can decide to go with force-placed insurance. CFPB wants to change this. If the servicer would be advancing money for force-placed insurance anyway, renewing the borrower’s policy is likely to be cheaper and better coverage. So, under the new proposal, the servicer could not get force-placed insurance for a borrower with an insurance escrow account, unless the servicer reasonably believes that the borrower’s insurance was canceled or not renewed for some reason other than nonpayment of premiums. Good idea?
CFPB does want comments on a possible alternative approach for borrowers with escrow accounts: the servicer would not have to advance funds to renew the borrower’s insurance if getting force-placed insurance would cost the servicer less than the amount it would have to advance to continue the borrower’s policy. What are the plusses and minuses of this alternative approach? Should it also include a requirement that the force-placed policy protects the borrower’s interests?
What if there isn’t an escrow account for insurance premiums? Consumer advocates have argued that servicers still should have to advance funds to renew the borrower’s policy instead of getting force-placed insurance. Servicers have argued that paying insurance premiums for borrowers who don’t have escrow accounts isn’t practical. CFPB isn’t sure what to do about this and wants comments. How impractical is it for servicers to renew the borrower’s policy if there’s no escrow account? Are there ways around these practical problems? Should servicers be required to ask borrowers if they will consent to the servicer’s renewing their insurance?
What this means for servicers. CFPB is encouraging servicers to avoid force-placed insurance by exempting renewal of the borrower’s own insurance from the new notice requirements described in the next section. So long as state law allows and the insurer will accept monthly premium payments, servicers who advance money could do so on a month-to-month basis to manage the risk of a borrower cancelling the policy and keeping the refund. CFPB believes that the loan owner, as well as the borrower, would benefit from avoiding force-placed insurance because if the borrower defaults, the higher premium cost will likely be added to the unpaid loan balance. Are there problems with the proposed new approach that CFPB hasn’t considered?
As part of a general expansion of the scope of Regulation X, the force-placed insurance requirements would apply to subordinate lien (as well as primary) closed-end mortgages.
Read what CFPB says in the NPRM about force-placed insurance and escrow accounts.
§2. Warning borrowers in time to prevent force-placed insurance.
CFPB is hoping that if borrowers get better information about the costs of force-placed insurance, they will try to keep their own policy in effect – or, if their policy has lapsed, get back on to a policy of their choosing as soon as they can. Also, CFPB proposes that force-placed premiums and fees have to be “bona fide and reasonable.”
What this means for consumers. When a servicer is going ahead with force-placed insurance, it would have to give the borrower two written notices before charging them: one 45 days before the charge and another 15 days before. You can read them here:
Are these notices clear? Should they contain more or different information?
The servicer may buy force-placed insurance during the 45-day period, but can’t charge the borrower for premiums during the 45 days unless the borrower doesn’t show that his/her own policy remained in effect. Force-placed insurance premiums and fees must be “bona fide and reasonable,” which means an amount that is reasonably related to what it actually costs the servicer for a service it actually provides.
Once a force-placed policy is in effect, similar rules would apply for renewing it. Again the borrower must get two notices before being charged for the renewal premium. You can read them here:
At any time while force-placed insurance is in effect, the borrower can get his/her own insurance. Under CFPB’s proposal, once he/she notifies the servicer, the servicer must cancel the force-placed insurance and refund any premiums and fees for the time when the force-placed insurance overlapped with the borrower’s own policy.
What this means for servicers. CFPB is proposing that servicers cannot charge for force-placed insurance unless they have a “reasonable basis to believe” the borrower no longer has coverage. “Reasonable basis” includes the servicer not getting a renewal bill for borrowers with an escrow account or, for any borrower, getting a notice of cancellation or nonrenewal from the insurance company. Are there other examples CFPB should include of ”reasonable basis”?
For purposes of “continuous” coverage, borrowers must get the benefit of any grace period for paying premiums. If the borrower verifies that he/she has obtained insurance while a force-placed policy is in effect, the servicer must cancel the policy within 15 days of receipt. Servicers will want to review examples of how to calculate a refund due the borrower for any overlapping period. Servicers must accept “any reasonable form” of written confirmation of insurance.
Although servicers do not have to use forms identical to the sample notices, they must highlight text as shown on the samples. Servicers will want to read what a “good faith” estimate of the cost of force-placed insurance would mean.
CFPB is looking for additional information about what disclosures servicers are now providing, and what the cost of complying with the new disclosures would be. It anticipates that the result of the proposals will be fewer force-placed policies. How would this affect servicers?
Read what CFPB says in the NPRM about force-placed insurance.
See the text of the proposed rule and CFPB’s commentary: § 1024.37