REQUIRED READING: For many years, lender-placed insurance attracted very little attention outside of the financial services world. That changed dramatically last year, with new challenges brought against the product on a federal and state level.
In April 2012, the Consumer Financial Protection Bureau (CFPB) announced that it would offer a series of proposals designed to ‘help protect mortgage borrowers from being hit by costly surprises or getting the runaround from their mortgage servicer.’ CFPB Director Richard Cordray used the announcement to suggest that servicers were making an inappropriate use of products such as lender-placed insurance.
‘For too long, mortgage servicers have not been held accountable to their customers, and the result has been profoundly punishing to homeowners in distress,’ said Cordray in a press statement announcing the plans for the proposals. ‘It's time to put the 'service' back in mortgage servicing.’
Four months later, the CFPB put forward a series of proposals that included lender-placed insurance. Referring to the product as ‘force-placed insurance,’ the agency sought to frame its proposal in a manner that suggested an unfair financial burden was placed on borrowers.
‘Servicers have the responsibility to ensure that borrowers maintain property insurance,’ said the CFPB in its proposal. ‘If the borrower does not maintain this insurance, however, the servicer has the right to purchase insurance to protect the lender's interest in the property. This is called 'force-placed' insurance and is typically more expensive than insurance the borrower could privately purchase.
‘The CFPB is proposing a rule that would provide more transparency in this process, including requiring servicers to give advance notice and pricing information before charging consumers for this insurance,’ the agency continued. ‘The servicer would also be required to terminate the insurance within 15 days if it receives evidence that the borrower has the necessary insurance and the insurer would refund the force-placed insurance premiums.’
Separate from this development, insurance regulators in California, Florida, New York and Texas held public hearings in 2012 that focused on the costs of lender-placed insurance. Long story short, the regulators were not pleased.
‘Our hearings suggest a lack of competition, high prices and low loss ratios, all of which hurt homeowners,’ said Benjamin M. Lawsky, New York's superintendent of financial services, who concluded his state's hearings with the announcement that lender-placed insurers doing business in New York would need to lower their premiums.
And even the mainstream media got in on the act, skewering the product as a weapon against distressed homeowners. Last year saw such provocative headlines as The New York Times' trumpeting ‘The High Price of 'Forced' Insurance’ and the Minneapolis Star-Tribune's insisting ‘Forced Insurance Policies Cripple Minnesota Homeowners.’
Pros and cons
If one listened only to the CFPB and state regulators, it would seem that lender-placed insurance had no positive aspects. Within the mortgage servicing industry, however, the product is recognized as beneficial for homeowners.
‘The positive aspect of lender-placed insurance is that there is not a lapse in hazard coverage in the event of a fire or other hazard that may destroy the property,’ says Benton Neese, president of the board of directors of REOMAC, a trade association for the mortgage default industry. ‘The advantage to the homeowner is that, should an insured event occur, the homeowner would not have the entire liability to shoulder. For example, if the homeowner does not pay the premium on their homeowner's hazard insurance policy and a fire occurs during the uninsured period, the homeowner is liable for repairing the damages – the terms of a deed of trust require the property to be maintained. With this policy in place, the homeowner would rely on that coverage to repair the property.’
‘Lender-placed insurance is an integral part of home mortgages,’ says Robert Byrd, senior director of communications at Assurant Specialty Property, based in Springfield, Ohio. ‘In a crisis, it's the last line of protection for many homeowners. As just an example, we have thousands of customers who would have been without insurance during Superstorm Sandy without our coverage.’
But that's not to say that some concerns raised by regulators about insurance premiums were not justified.
‘Lender-placed insurance can be substantially higher than standard homeowner policies,’ says Scott Lehrer, senior vice president of Ontario, Calif.-based First Mortgage Corp. ‘I agree that the regulators are justified in their concerns. Borrowers face payment shock after lender-placed insurance is included in their monthly mortgage payment.’
‘Not only are premiums for lender-placed insurance generally much higher, but the coverage is more limited than the homeowner's insurance that could have been purchased by the borrowers,’ observes Les R. Kramsky, executive vice president and general counsel at The Silk Companies, a Plymouth Meeting, Pa.-based family of companies providing insurance, settlement and real estate services. ‘These high rates bring us to the issue as to whether the lenders and the insurers are making excessive profits for lender-placed insurance when the premiums are being paid by the borrowers.’
Kramsky points out that one of the chief concerns raised by state regulators involved the issue of ‘reverse competition,’ in which the lender was not motivated to shop around for lender-placed insurance with the lowest premiums.
‘Unfortunately, in many instances, the lender is motivated to select coverage that is in the lender's best interest rather than what is in the borrowers' best interests,’ Kramsky adds.
Yet Matthew Freeman, executive vice president of mortgage lender services at QBE North America in Atlanta, notes that holding up lender-placed insurance premiums against other products is the insurance equivalent of an apples-and-oranges comparison.
‘It is true that lender-placed insurance is typically – but not always – more expensive than traditional homeowners policies,’ he says. ‘But there are reasons for that. Lender-placed insurance is written on an as-is/where-is basis, and it provides the ultimate backstop for the homeowner's property.’
The CFPB says…
Going forward, a possible wild card involving lender-placed insurance might be the aforementioned CFPB proposals, which were formally announced in January.
‘The CFPB rule would require servicers to continue advancing funds to keep the existing homeowner's policy in effect rather than letting it lapse, so lender-placed insurance would not occur,’ observes Lehrer. ‘However, this requirement does not apply if a borrower does not have an escrow account.’
‘The CFPB requires mortgage servicers to give advance notice and pricing information before charging consumers for lender-placed insurance,’ adds Kramsky. ‘The servicer would also be required to terminate the insurance within 15 days if it receives evidence that the borrower has the necessary insurance, and the insurer would refund the force-placed insurance premiums.’
However, some of the CFPB's requirements will seem very familiar to servicers.
‘Many things suggested by the CFPB are industry best practices that were in place for some time,’ says Dennis Swit, managing partner at Cleveland-based Loan Protector Insurance Services. ‘For example, refunds are being processed properly, and notifications are sent to borrowers when coverage has lapsed.’
Still, Assurant's Byrd notes that the lender-placed insurance environment will not become any easier in the coming year.
‘This is a challenging business – it's very complex, working with numerous financial institutions with varying insurance requirements and varying technology platforms,’ he says. ‘And it's risky insuring large collections of houses you've never seen, where no one was paying the insurance anymore – and where you commit to writing a policy for all uninsured properties, even in catastrophe-prone areas. But it's vital to the housing market that providers are here and be well capitalized, with a long-term commitment to provide the safety net that homeowners and lenders need. Past history would indicate that very few carriers have shown the commitment to stay in through multiple high-catastrophe years.’