Part 2 – Challenging the Force-Placed Insurance Business Model: Early History
“Challenging the Force-Placed Insurance Business Model” will take the next two blogs to review the history of Force-Placed Insurance. These blogs will be a deep dive into our past.
In Part 2, we deal with how Force-Placed Insurance worked before the internet and some of the techniques used to generate premium back in the X-checking days.
Part 3 we will deal with how the money-center banks turned Force-Placed Insurance into a fee income product. This will explain the details of how the force-placed insurance class action lawsuits formed. Were consumers behind these lawsuits, or was it Wall Street?
When we finish, we will have a basic understanding of why the words “Force-Placed Insurance” appear 330 times in Dodd-Frank.
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The Early History of Force-Placed Insurance
Force-Placed Insurance (FPI) began in its modern form with the introduction of the PC and mid-range batch processing computing in the mid-1980s. Innovative insurance companies created the “X-Checking” insurance tracking methodology. X-Checking had loan servicing open insurance mail looking for letters of cancellation or non-renewal. This information would be data entered, and the MS-DOS or IBM AS/400 data file was sent to the insurance tracker weekly via US mail.
Insurance trackers would use these files to place insurance on the borrower at the expiration date. Insurance Placements, known as “Notices of Insurance,” were based on a 12-month FPI policy whose premiums could be in the thousands of dollars. The insurance tracker would bill the lender, and the lender would subsequently charge the borrower.
X-checking was only looking for cancellation or non-renewal insurance documents. The insurance tracker did not process the reinstatement documents from the borrower’s insurance company. Also, there was no timely process to refund a false-placed borrower. Timely refunds were not a priority unless demanded by the lender. Slow refunds provided insurance trackers with premium “float” as refund dollars where kept in-house as long as possible. Float became a common income source amongst insurance trackers.
Force-Placed Insurance Compliance History
Collateral Protection Insurance, as it is known, is force-placed insurance for vehicles. In the early 1990’s Edelman-Combs, a class-action law firm out of Chicago, successfully litigated a class-action lawsuit against a lender in Alabama. This successful litigation created a wave of class actions that decimated the Collateral Protection industry for over ten years.
Six years after the first class-action lawsuit, the National Association of Insurance Commissioners (NAIC) created a Creditor Placed Insurance Model Act. This Act gave vehicle borrowers specific rights, required lenders to pay for certain coverages, and protected the insurance trackers from class action litigation.
There was virtually no regulation of hazard insurance tracking before Dodd-Frank passed in 2010. In 2006 as Miniter Group formulated our design for Borrower-CentricSM Insurance tracking, we used to refer to hazard insurance tracking as the “The Wild West.” We didn’t like what we saw (details in part 3). Without any consistent regulatory guidance for hazard insurance tracking, we decided to follow the guidance set by the NAIC Model Act that was in place for vehicles. The model act turned out to be the right choice as the CFPB used this same guidance when they reformed RESPA in 2012.
Follow the Money to Understand Why FPI Needed Reform
Insurance trackers found it profitable to take over data entry from the lender’s loan servicing department. No longer were lender sending cancellation and non-renewal data on diskettes, they were sending daily insurance documents to the insurance trackers. Trackers found that full insurance tracking, which processes all insurance documents, could lead to additional force-placement insurance premiums.
Insurance trackers quickly found that the fastest way to generate large amounts of force-placed premium was to “survey” the lender’s portfolio at the beginning of the outsource insurance tracking engagement. Here is a typical survey’s chronological workflow:
- Send a notice to all borrowers in the portfolio asking for the declarations page (DEC) of their insurance policy.
- Send a second identical notice within 30 days.
- Force-place all borrowers who did not reply.
- Provide refunds to borrowers only after receiving a current DEC page.
As you can imagine, this generated a vast amount of FPI premium within the first 45 days of the engagement. The majority of borrowers that were force-placed had insurance but had not submitted their DEC page. Since there was no regulation on how quickly to refund premium, the insurance tracker used the premium “float” to their advantage.
Trackers will argue that this technique quickly eliminates uninsured collateral in the portfolio. We will argue later that there is a better way.
Money-Center lenders began to notice the vast amounts of premium generated by force-placed insurance and they wanted a piece of it.
Part 3: “How the Money-Center Banks Got In on the Party“
Please comment within the LinkedIn Group “Bankers & Force-Placed Insurance” so that we can keep the discussion within the group.