Originally Published - Sep 04, 2012
In our recent compliance webinar, we discussed the common denominators that make up the scrutiny from private litigation, government scrutiny and regulatory compliance. We took the details from each of these segments and combined them into a list that lenders need to know regarding their force-placed insurance program.
Here are the top 6….and I will follow with my short comments of each...
1. Eliminate fees
2. Establish backdating guidelines
3. Premium must be reasonable
4. Borrower notifications
5. Borrower Proof of Insurance
6. Treat borrower with respect
The fee income days of force-placed insurance are about to end. Benjamin Lawsky, who heads the New York Department of Financial Services, recently was quoted in American Banker commenting on the relationships he discovered during his recent hearings regarding bankers, servicers and insurance companies ….
"We should consider whether banning these relationships makes sense. The perverse incentives that such financial arrangements may create would appear to harm both homeowners and investors while enriching banks and insurance companies"….
This is a typical statement we hear from regulators, AG's and class action attorneys. We are still waiting for the CFPB and the NAIC to weigh in....
If your taking commission, getting retrospective rating refunds orre-insuring your own borrowers' force-placed insurance, you should start looking for a way to unwind this. I know of two top 20 banks currently "unwinding". IF you don't, I'm predicting the class action attorneys will do it for you…..as well as take 33% of the your fines for their efforts….
Establish Backdating Guidelines
This is the red meat that class action attorneys are looking for. The regulators are all over this as well. Every lawsuit that I read has arguments regarding the backdating of insurance coverage.
Long backdating can easily happen when a lender first implements a force-placed insurance program. If you are thinking of outsourcing your force-placed program due to all of the compliance regulations, make sure to watch your vendor during implementation to make sure this doesn't happen.
My recommendation is not to allow backdating further than the Dodd-Frank defined letter cycle of 45 days.
Premiums must be reasonable
I calculated rates from some of the public information provided in one of the Florida lawsuits. One large insurance company had rates of $8.33 per hundred insured….to give you some prospective, I have seen rates as low as $0.60 per hundred in middle America…. There is just no way that you can justify that rate….once again, the class action folks will get 33% for their efforts….
I would suggest that banks get market quotes for force-placed insurance. Especially if your policy is a surplus lines policy. You should do this at a minimum to paper your files with a recent market quote. Insurance companies are very concerned...they are adjusting rates….make sure you take advantage of the new rates...for both you and your borrowers.
I would say that the vast majority of banks do not currently meet the Dodd-Frank regulation regarding written notification to un-insured borrowers. I can guarantee that when the CFPB weighs in January, this will be addressed. Class action attorneys also successfully argued regarding borrower notifications in one lawsuit.
If you do not have a systematic workflow to send uninsuredborrowers written notification, you need to address this immediately. Make sure you keep copies of all of these outbound notification letters as they will need to be produced at audit time.
Borrower Proof of Insurance
Dodd-Frank, the Robo-Signing Settlement and Fannie Mae Guidance all define requirements for the borrower to prove insurance coverage. Dodd-Frank requires "reasonable form of written confirmations" that includes the borrower’s policy number and insurance contact information.
In the near future, insurance trackers will be required to accept this "written" information on the back of a napkin. This is not a bad thing. Insurance trackers should be verifying ALL insurance documents they receive from a borrower. A paper napkin or a State Farm declarationspage...either should be acceptable.
Proof of insurance is one of the areas where insurance tracking customer service can make great strides forward. Moving to a "trust but verify" workflow is the first step of improving the borrower insurance tracking experience.
Treat the Borrower with Respect
Having been involved with collateral risk transfer and insurance tracking for a good portion of my professional life, I can attest to the fact that insurance tracking is not a pretty business.
When a borrower receives a letter from their lender suggesting that the do not have proper insurance, you're not likely to put a smile on your borrower's face, whether they have valid insurance or not.
When we set out to build our insurance tracking system in 2005, our survey information told us that improving the borrower experience is where we could make radical changes to our industry. Our "Borrower-Centric" insurance tracking system was designed & developed specifically to provide exceptional customer service to the borrower. We found that the best way to do that is not to get the borrower involved in the first place….
It's easy to send a letter to the borrower TELLING them they don't have proper insurance and then TELLINGthem to do something about it or else…. was the old legacy way of doing things. Your friendly class action attorney is going to make sure to nuke this old legacy methodology.
In 2013, the new world of insurance tracking will require very little of the borrower and much more of the lender and their insurance tracking partner.
Since 2005, we have been building a tracking system and providing collateral risk transfer advice that complies with all of the common denominators discussed above.
We currently have over 125 lenders using our force-placed insurance tracking solutions. These banks and credit unions are already prepared if any scrutiny was to come their way. They do it right….track your borrower's insurance respectfully and force-placed insurance as a collateral risk transfer tool only when all other options have failed.
I invite you to attend our periodic compliance webinars that I host monthly. We will be discussing the new compliance enforcement as well as new developments as our clients go through CFPB audits.
This concludes my 5 part series on force-placed insurance. Continue watching my blog as we will be commenting on industry topics associated with collateral risk transfer techniques.