Home Mortgage Consumer Protection

§1. What’s going on here?

This is a summary of discussion on the “For Borrowers in Trouble: “Force-Placed” Insurance” post from August 10 to October 3, 2012. (On that date, the post was closed to further discussion.) It was written by the Regulation Room team. This version is a DRAFT. Please help make sure that nothing is missing, wrong, or unclear. You can propose changes to this version until October 8.

The goal is to give CFPB the best possible picture of the different views, concerns, and ideas that came out during the discussion. This is NOT the place to reargue your position or criticize a different one. Focus on whether anything is missing or unclear, not whether you agree or disagree.

On October 9, the Final Summary will be posted on Regulation Room and submitted to CFPB as a formal comment in the official rulemaking record. (October 9 is the last day of the official commenting period.)

Please take a few minutes to fill out this SHORT survey about your Regulation Room experience, it should take less than 10 minutes. Your feedback is important to our work in expanding public understanding and meaningful participation in government policymaking. To show our appreciation for your help, 2 people who respond by November 1 will receive $50 gift certificates to Amazon.com.

§2. Support for restricting use and cost

One commenter (who commented extensively on this topic and self-identified as a former employee of Balboa Insurance Group turned whistleblower) emphasized additional harms that force-placed insurance could cause borrowers, including substantially increasing the monthly payment to cover what is now a negative escrow balance. A negative escrow balance in turn can keep the borrower from qualifying for a loan modification. According to this commenter, “force-placed insurance is why so few borrowers have qualified for the HAMP & FHA loan modification programs.”

S/he also argued that FPI should be considered a service rather than a product: “The 2 largest Insurance Trackers in the US are Assurant & QBE First/Praetorian (fka Balboa Insurance Group). . . [T]hey are also the Force-Placed Insurers. . . [V]oluntary companies like State Farm, USAA & Allstate don’t provide the Force-Placed Insurance ‘product’ to anybody. . . The Insurance Tracker is providing the service of placing insurance on a loan. They are simply choosing to only place their in-house proprietary insurance.” This commenter advocated that CFPB limit insurance trackers to charging a service fee “for price-shopping insurance” (suggested maximum $35). Considering the current system a conflict of interest, s/he argued that trackers should be prohibited from selecting their own insurance (or that of an affiliate) and required to select the cheapest insurance available.

Some commenters who supported CFPB’s basic proposal recounted bad experiences with force-placed insurance. One commenter (consumer who got or refinanced a mortgage in past 10 years) wrote: “My lender erroneously determined that I was in a flood area and despite my protests (and documentation) that I was not in a flood area went out and bought flood insurance at very high rates. When they finally evaluated my documentation they agreed to cancel the policy since I was not in a flood area but did not want to refund the cost of insurance for the time the insurance had been in place. It took many hours, calls, and escalations, and preliminary discussions with attorneys to get the cost of the unnecessary insurance refunded.” This commenter favored imposing a penalty on servicers for wrongful force-placed insurance on top of the refund requirement. S/he also supported limiting force-placed charges to no more than 10% higher than the lesser of “competitively priced policies” or “the rate the homeowner had been paying.”

Another commenter (self-identified as a researcher affiliated with an advocacy group) argued: “This should not be an issue if the homeowner had escrow for insurance. The Servicer should pay the original insurer. Notice should be sent to the homeowner that the policy was paid on every anniversary with the name of the insurance company.” S/he explained: “We have submitted 5 complaints to the New York State Banking Dept. of homeowners who received forced placed insurance that was 5 times more than the policy on record.”

Support also came from a commenter (consumer who got or refinanced a mortgage in the past 10 years) who urged that homeowners’ insurance should have a guarantee of reissue at the same premium, which the servicer should have to use. “This simple and straightforward change would remove the potential for servicers and insurers to game the system.”

One commenter (a consumer whose household makes less than $100,000/year) said that s/he agreed with some comments and disagreed with others but warned that if lenders were prevented from using force-placed insurance, loans would become more costly. This commenter believed that the current rule is that the lender can place only enough insurance to cover the payoff amount.

§3. Small lenders on the proposal

The small servicer perspective was revealed in an interchange between a commenter who self-identified as a mortgage servicer/originator/owner whose company’s customers are mostly from the local community, the commenter who identified him/herself as a former insurance company employee and whistleblower, and the moderator.

The small lender argued that CFPB’s proposal “places an undue burden on the mortgage servicer …, particularly with small balance loans where the servicer only needs to protect its interest in the property, not the full value of the property.” S/he gave the following “real world example:”

“I am a mortgage originator and loan servicer. I hold all the loans I make. I have a customer who has stopped making payments on his account. He is 6 months past due on his loan and has refused to make contact with us. He is in foreclosure. I escrow for his taxes and his insurance. He has a large shortage in his escrow account. His homeowner’s renewal is due on October 23, 2012. The renewal premium is $1,398.00.

“The proposed rule would require that I pay his insurance premium from his escrow account even though he does not have enough money in his escrow account to cover the premium. I can write forced placed insurance to cover my interest in his property for $460. Yes, the insurance is inadequate for his needs, but it is perfectly adequate for my needs.

“Here are the steps I have taken to deal fairly and completely with this customer.

“1. I have informed him by mail that
(a) I will no longer be escrowing for his homeowner’s insurance.
(b) His policy will be renewing on October 23, 2012.
(c) He needs to contact his agent to make an arrangement for payment on the policy.
(d) as long as he keeps the policy in force, we will not issue forced placed fire insurance.
(e) if he allows his insurance to cancel we will write a forced placed policy providing coverage to protect my interest in the property at a cost of $460.00.
(f) if forced placed insurance is required, he will be responsible for paying this cost.
(g) the forced placed policy is for my benefit only and is insufficient for his needs.

“2. I have redone his escrow analysis and reduced his monthly tax escrow payment.

“The steps I have taken seem perfectly fair and reasonable. This proposed rule implies that even if the borrower has stopped paying the loan, I as the mortgage holder and loan servicer have a responsibility to protect the borrower, no matter how much money it will cost me. In today’s world it could take years to finally take back a property. This rule would require me to pay the borrower’s policy premium for 2, 3 or even 4 years, even though I could protect my interest in his property for 1/3 the cost.”

Questioned by the other commenter, the small lender explained that the force-placed policy in the example “is a Lloyds of London policy written through SWBC. The cost is $1.50 per $100 of coverage plus 3% tax. We are absolutely not self-insuring. Also, there is absolutely no add-on costs. I charge the customer exactly what SWBC charges me.”

The moderator asked: “Is [it] usually the case [that force-placed insurance will be cheaper], or does [this happen] when a substantial part of the mortgage has been paid down? If [the latter], in your experience, roughly how much of the mortgage needs to be paid for the force-placed insurance to be cheaper than the homeowner’s policy? Also, do you think there would be a difference if the lender and servicer were two separate businesses (rather than, like in your case, having the owner and servicer be the same)?”

The small lender responded:

“1. There are a lot of variables which determine the cost of the HO Ins [homeowner insurance] policy. Credit history and property location are probably the two most important. $100,000 of forced placed insurance would cost, through my provider, $1,545.00. A HO Ins policy through a traditional carrier with dwelling coverage of $200,000.00 could cost, based upon my experiences, between $600 and $2,000. But I deal with smaller balance loans of 10K to 30K, where the cost of the forced placed policy is almost always less than the HO Ins premium. So, there is no simple formula that we can use to say that when the mortgage is paid down by X percent, forced insurance will be less expensive than traditional coverage.

“2. Although I would happily accept an exception for mortgagees who service their own loans (which I am), I think the rule should be based on a solid princip[le]. As the rule stands now, someone — either the servicer or the note owner — is being required to pay out more money than it has to in order to protect its interest in the property. Just because the servicer is different from the note owner really should not make a difference. Someone is being forced to potentially lose more money than necessary.”

The moderator then asked: “CFPB’s alternative proposal would allow a servicer to use force-placed insurance, but only if it would cost the servicer less than continuing the homeowner’s policy. Would this address your concerns, and do you see any drawbacks to this?”

The small lender responded: “The CFPB’s alternative proposal is certainly more appealing than the existing proposed rule. In my situation, the forced placed policy will most likely cost less than the HO Ins policy. So, I can accept it for sure, but I don’t think it is based on a sound princip[le]. As a drawback to the alternative rule, I do see some litigation issues. If I choose forced insurance over the defaulted borrower’s HO Ins policy, and there is a loss, some heavy litigation could result. But overall, I absolutely prefer the alternative proposal.”

S/he also addressed the problem of a borrower canceling the policy and receiving a refund of the money paid by the lender: “The commentary suggests that the mortgage servicer pay the HO Ins premium monthly to avoid having the customer cancel the policy and run off with the funds. I strongly believe that this is an untenable situation for the loan servicer, which now has 12X the amount of work to do.”

The small lender urged CFPB to recognize that “If a customer is in default and has not made payment for many months (often times years), the home owner is being unduly enriched and the mortgage servicer is being harmed by having to [maintain the existing policy and] payout much more than it otherwise would have to to protect its interest in the property.” S/he suggested that “[t]he real question is the definition of default. 1 or 2 months behind is clearly not enough. But if a consumer hasn’t made a payment for 6 months, the servicer should be free to inform the customer that it no longer will escrow for HO Ins. The consumer can then look for their own insurance. If they get it, great. If not, then the lender can place forced insurance.”

S/he concluded: “I know that the public is angry and wants to make Wells Fargo and Bank of America pay for everything, as retribution for the mortgage meltdown. But small mortgage holders like myself are being forced to pay for the sins of others. The rule is unfair to me and is simply wrong, based upon how our American system of economics functions. I strongly recommend that the CFPB rethink its rule and implement a new rule which requires the mortgage servicer to inform the borrower of the situation and give the borrower the opportunity to take responsibility for himself, as I have outlined above.”

§4. Borrowers without insurance escrow accounts

A second interchange, between another commenter self-identified as working for a lender whose customers are primarily from the local community and the commenter who formerly worked for Balboa Insurance, focused on the question whether servicers should have to advance money even in absence of an escrow account.

This small lender explained:

“I work at a federal credit union. We currently send out three warning letters (over a 90 day period) prior to force placing insurance. The letters are progressively stern starting with the friendly reminder to finally informing the borrower what the cost will be. The letters have our name and return address on the envelope and do not look like junk mail. [This responded to an earlier comment urging that the envelope should state “that it is from the Loan Servicers [and] that it is important information regarding their mortgage”] You would be surprised how many people ignore them until they receive the fourth letter which details the amount added to their loan to cover the CPI [collateral protection insurance]. Only then do they call us.

“As a lender I make no money from CPI and, more often than not, have to charge off the cost when the debt goes bad. But, the alternative of not having the property insured is too great a risk.

“If there is no escrow for insurance the idea of the lender having to pay the primary homeowner insurance is unworkable. First I will have to determine if they use an agent or directly pay the company. Then, I will need to review the coverage (do I really want to pay the rider that covers the jewelry and their jet ski?) It is unworkable.”

This statement was challenged by the former insurance company employee commenter: “I’m not seeing the difficulty in providing the same service to Non-Escrow customers. Don’t you keep a database of who is agent or company billed for your Escrow customers? The systems are clearly in place by your own admission. You’re just adding more volume, so hire a few more people.” To which the small lender responded:

“First, where do I get the funds to pay these people? We operate on a razor thin margin. If I hired ‘a few more people’ for every regulation I would lose money and no longer be in business. A credit union is a not for profit enterprise but it cannot lose money and remain in business.

Second, while a data base is in place for escrow accounts no such system exists for non-escrow accounts … Who do I pay? The insurance company directly or an agent? Once insurance is force placed things go downhill very quickly and the chance of my getting paid back is slim to none. Even if I could find out who to pay I am not going to misuse the credit union’s funds to pay for additional riders on a homeowner’s policy.”

Related to the general point of what force-placed insurance ought to cover, several comments urged that servicers be required to purchase only the minimum necessary insurance. For example, one consumer commenter argued: “Get the insurance payment as low as possible by eliminating all optional coverage and only insure the structure for the bank at the lowest price possible.”

§5. Information on insurance status

Continuing the theme (which appeared in many places in the discussion) about better use of technology to solve or avoid problems, one commenter urged that borrowers should be able to update their current insurance information online. This same commenter (who had been employed by Balboa) also warned that borrowers who call their servicer to discuss insurance are often transferred, without their knowledge, to someone working for the Insurance Tracker. S/he urged a requirement that consumers be informed that they are being transferred to a third party, as part of making the relationship between servicer, insurance tracker, and force-placed insurance more transparent.

§6. Analogous issues with REO insurance

Although the CFPB has not addressed Real Estate Owned (REO) Insurance in its proposal, two comments also argued the need to regulate unnecessarily high, above market level REO fees that some borrowers currently pay. One (a consumer who had personal or family experience with a foreclosure, in a household earning less than $100,000/year) recounted his experience:

“[W]hen I was forced into REO [real estate owned] due to default, and on medical disability, the monthly insurance cost was three times the annual cost of my then existing annual Allstate policy cost, which had also had additional riders, including liability umbrellas for my auto and additional personal medical for visitors, comprehensive platinum content coverage. [I]t belies common sense that they be allowed to fleece and abuse already indigent homeowners, like that. Charging 3 times what my full policy costs in a year, in a single month, and not even covering the whole contents of the house.”

This commenter argued that lenders placing insurance “should have to use and provide traditional carrier insurance through market channels at prevailing fair market insurance rates for the property.” The other commenter (former insurance company employee turned whistleblower) vehemently agreed that REO insurance also presents a problem. S/he argued that the law should categorically prohibit charging REO insurance against the borrower’s escrow.

§7. Private mortgage insurance

There seems to be confusion among some consumers about the relationships and differences between the hazard insurance that may become force-placed insurance, REO insurance (see previous section) and private mortgage insurance. One commenter (consumer who had personal or family experience with foreclosure) reported the following problem with private mortgage insurance:

“My intentions upon taking out the loan and putting down 20% was to avoid having to pay a PMI. I had no knowledge that a LPMI policy was in place on my loan. USC Title 12 Chapter 49 Homeowners protection sec 4905 states the required disclosure of an LPMI prior to closing the loan as it could cause a higher interest rate. But the statutory damages under sec 4907 set a maximum of $2,000 in damages. The costs of the action and attorney fees don’t promote any lawful deterrence. The servicer wrote after my own discovery that no premiums were add[ed] to the loan. How would a consumer be able to verify this?”

Another commenter (consumer who had personal or family experience with foreclosure) was also concerned about this issue, and argued that borrowers should be able to shop for the best deal on PMI insurance rather than being forced to accept the policy chosen by the lender.