CFPB Might Be Vulnerable Now - Is There Enough Crow to Go Around?

by Robert Smith

Originally Published - Nov 09,2016

This humble little post comes in the sea of news stories and commentaries about the stunning victory of our new President-Elect, Donald J. Trump. And, like so many of those stories and commentaries today, this one is a look back and recognition that what we thought was certain is most certainly not. One of the big topics has been what Trump and the Republican controlled Congress will do with the Affordable Care Act. However, while that is hugely significant in its own right, let us not overlook what may happen to Dodd-Frank and the CFPB.

Back in April 22, 2016, I wrote a response to what was, quite honestly, casual commentary from some of my peers and the lending industry regarding the CFPB. There were a handful of individuals who felt the agency was too onerous, and Congress was at least going to have to put a leash on it, if not render it mostly ineffective or dismantle it entirely.

In my own circles at least, only a few people seemed to be saying that. Most of us saw the CFPB as something that was here to stay. Even if it were somehow reformed, its intentions and its mission would be largely left intact, and it would be left with significant power to act on them. In June, the House Financial Services Committee released the text of a bill sponsored by Rep. Jeb Hensarling (R-TX5) to roll back Dodd-Frank and make massive changes to the nature and powers of the CFPB. It was introduced on September 9th as H.R. 5983.

I see how that move could be dismissed at the time. Frankly, I dismissed it myself. It seemed to be little more than political gesturing, a show of resistance and an effort, however effective or ineffective, to at least force the issue to be revisited. Whatever it was, the bill itself was dead on arrival. Even if it made its way through the Republican controlled Congress before January, there was no way President Obama would sign it into law. Hillary Clinton seemed destined for the Oval Office, and it was highly improbable she would approve it. That assumed it would even reach the President's desk after January, when it looked as though Democrats would likely take control of the Senate.

Today, we know that Donald Trump, not Hillary Clinton, will be the next President of the United States. We also know that Republicans will retain control of both houses in Congress. Suddenly, this once toothless bill has some bite to it. The economy is one of the dominating themes from Trump’s message, and the lending and credit industries are inevitably going to be a large part of that. The message from Republicans this morning sounds far more united and emboldened than it did even a month ago. I predicted about six and a half months ago that the CFPB was likely here to stay. I think my Thanksgiving bird this year will be crow.

Lesson from the NY Fed: Play It Safe, Sorry is Not Worth It

by Robert Smith

Originally Published - Jul 05, 2016

In March, news broke that hackers stole $81 million from the Bank of Bangladesh out of their account with the Federal Reserve Bank of New York. It seems the New York Fed was largely diligent on their end at first glance, if not perfectly. The failure occurred within the SWIFT system, not its own. Further, they were alert in catching a simple typo and stopping all further transfers, preventing what would have been a loss that was over ten times larger. The issue coming more and more to the forefront now, however, is the possibility they were, at least in part, negligent.

In fairness, situations like this can and do happen, even if they rarely ever reach this size and scope. Every proper and reasonable precaution is taken – security systems are implemented, policies and procedures are developed, and employees are trained to them – and yet something manages to slip past all the safeguards. Of course, when it comes to securing assets and information, we have to put some gates in the walls. I once jokingly told a colleague that, as a compliance professional, my ideal situation is one in which no one can access anything; that way I know nothing can go wrong with it. Of course, in that scenario, all transactions would cease and we would go out of business. There has to be some reasonable access.

The question in the case with the New York Fed is what was really being reasonable, and what was simply not being careful? One of their earliest replies should raise some questions about protocol. They state the transactions were approved by the SWIFT system. All well and good, except that the SWIFT system does not exist in a bubble inside of the New York Fed; it is a system of communication between it and other banks. The problem there is no amount of security on one end will stop problems on the other end.

Simply assuming that everything is fine when communication between two parties is involved is absolutely opening yourself to trouble. Many feel a bit incredulous toward the idea that a communication from a trusted source over a trusted channel could be fraudulent, but it is that very trust in familiarity that criminals such as these use to get what they want. SWIFT is a computer system. It is a strong first line of defense, but it should never have been the only line. Further, the heist was pulled across the weekend in both time zones. The Fed could not reach Bangladesh as it occurred, and Bangladesh could not reach the Fed offices when they discovered the problem. A major transfer occurring when the requester cannot be reached probably should have raised some red flags.

Since the news first broke, new developments have called the New York Fed’s security measures into further question. The requests that allowed the hackers to transfer $81 million were part of a second attempt. The first time they had formatted the requests incorrectly and the SWIFT system rejected them. Further, the hackers did not have the names of the correspondent banks to which wired funds usually went, and instead were paid to individual recipients. This is rarely done. Further, the individuals’ names appeared repeatedly across the 35 requests.

There is still a lot to learn about what happened, and Congress seems eager to do so, but without assuming too much on the mindset of the New York Fed employees there are still vital lessons all lenders should take away from this. First, there should always be strong protections in place to catch anything out of the ordinary. Second, nothing really takes the place of having someone actually look at a request to move funds. I sincerely doubt Congress will happily accept the explanation that SWIFT indicated everything was okay and this was not caught immediately, and I am equally doubtful any lender could successfully defend itself that way if deposits were lost in such a fashion.

There were a number of reasons for someone to put a halt on everything until the Bank of Bangladesh could be reached, but they were all overlooked. Only after $81 million was already sent did someone realize they had to put the brakes on those requests. It is true that, sometimes, even the best and most diligent efforts made within reason are insufficient. The problem here is that there is a very strong possibility that there were many reasonable options that could have been employed here with relatively little inconvenience. Perhaps those small inconveniences can add up over time, or perhaps they are significant when security protocols are new or updated, but was it really worth forgoing them for something like this to occur? When weighing the risks facing your own institution, and the efforts they involve, ask yourself how much the time and effort really cost compared to what you can lose in funds and in reputation. It could very easily make all the difference.

So FEMA suspended NFIP in a community with collateral properties, now what?

by Robert Smith

Originally Published - June 06,2016

Our company was recently approached with questions from our clients regarding the proper procedures for handling flood insurance if a community where they have properties securing existing loans is suspended from the NFIP.  It should be noted that none of the communities in question are suspended as of yet.  Though FEMA issues notices of pending suspensions rather frequently, actual suspensions appear to be a rare event, or at least short-lived.  Should it occur, however, it is not something that should create panic for a lender, but it should absolutely be given close and careful attention.

The first thing to keep in mind is that your borrowers' current, active NFIP policies do not cancel on suspension, but they cannot be renewed.  Your interests should be relatively safe in the short-term but, the longer a suspension goes, the more exposure your institution will likely face.  You may want to consider reaching out to the local government or the floodplain managers responsible for the suspended community.  They should be able to provide insight or help you get at least some idea of a time frame on getting the community back into compliance.

So what happens if you are or could be faced with a substantial exposure?  You are effectively free to decide what is best for your institution.  Lenders are urged by regulators to consider their risks carefully.  You are permitted, but not mandated, to require your borrowers obtain sufficient coverage under private flood insurance policies.  On new loans, you must still inform the borrower if the property is in a high-risk flood zone and the ability to at least buy private flood insurance.  Existing borrowers, though, should already be aware if they are in a high-risk flood zone.

Having fewer mandates may sound like it could make things easier, but it places a very serious responsibility in your lap.  There are two major questions from somewhat opposing views to ask yourself in this scenario: "Is it safe and sound to forgo or wait on requiring private flood insurance?" and "How will this impact our relationship with borrowers in that community?"

For the first question, consider how large of an exposure you are facing and for how long.  Though there is nothing directly requiring flood insurance on properties in a non-participating community, the principle of risk management remains.  Flood ratings exist since the community was participating, you know the risk exists, and you know depositor funds are on the line.  We see it as very conceivable an institution could be slapped with allegations of unsafe and unsound practices for leaving too much exposed.  Even if it did not happen now, it could only take one lender getting hit hard enough with collateral losses in a flood to compel regulators to pursue that avenue.  Additionally, it is hard to say what kind of reaction legislators could have to a number of borrowers losing their homes and being left unable to replace them.

For the second question, consider how much of a burden requiring private flood insurance could place on your borrowers.  Suspensions from the NFIP are not your fault, of course, but your borrowers may not care whose fault it is when they see how much it will cost them.  Force-placed insurance is more expensive as well, and could easily create resentment, not to mention complaints you may have to report to the CFPB.  Perhaps worse, it could even result in defaults.  Consider a borrower whose financial situation has become just manageable under normal conditions.  After the placement occurs at a non-participating rate, the borrower may be unable to keep up with the cost of insurance on top of their mortgage payments.

So what's the best option?  We think that will vary for each institution, as each will have to balance those two perspectives.  There may not be an ideal solution even in the best of cases, as either will likely come with challenges.  Getting more details on the communities themselves and any timelines for coming back into compliance may be key to developing the best solution.  It may be beneficial to get information on non-participating flood insurance rates as well.  In short, the best approach is to be proactive, gather all the information you can, and approach the risk assessment with the caution and diligence.

Will the Private Flood Insurance Bill Bring a Flood of Bad Mortgages?

by Robert Smith

Originally Published - Jul 05,2016

As the old adage goes, "All that glitters is not gold." Or in this case, "All that says 'Flood Insurance Policy' does not insure," at least not for the lender. I recently received a humbling reminder of why it is important to read a bill yourself, no matter how many reputable professional organizations get behind it.

Recently, the House of Representatives passed a bill that would enable private insurers to get more involved with flood and supplement the NFIP. If you look around for comments by those in the lending industry, you will find overwhelming support for this idea. It is a good concept, but that does not mean it is immune to flaws being implemented.

National Mortgage News released an article quoting Anne Canfield, Executive Director of the Consumer Mortgage Coalition, about what could easily turn into a massive flaw. To summarize her comments, there are two problems in the bill that could seriously undermine the ability of lenders to safely issue mortgages on properties in high-risk flood zones.

First, government sponsored enterprises and their servicers would not be permitted to reject private policies which insurance regulators approved if they are believed to have inadequate protection. Worried about that huge deductible with this borrower's income? Think an exclusion could come into effect too easily? Too bad. If it's a Fannie or Freddie loan, you're taking that policy.

Second, the bill as-is would enable the insurers to pay the borrower directly. The lender or servicer does not have to be named as a loss payee on the policy, and again, the policy would have to be accepted. That means a borrower could make a minimum down payment, get a high deductible flood insurance policy, and if a flood hits they could just walk away with the cash in hand.

There is a version of this bill currently in the Senate, and the Senate Banking Committee may well catch this problem and push to fix it from their side. Even so, it is a little surprising to look back at the overwhelming support for this bill, both in the House and from professional organizations, and realize either no one raised this problem or no one took it seriously. What might happen in years like 2005 and 2012? Would it really help consumers in the long run if lenders become unwilling to take on the risk of a property in a SFHA?

None of this is to prop up myself. I got as caught up in the good feeling that we might be moving toward a solution as anyone. Regardless, it should serve as a reminder to us all that any given solution is not necessarily a good one. We should also, like Ms. Canfield, be ready to approach the issues facing the industry with healthy skepticism.

ABA Challenges Perplexing Opinion of Some Examiners on Flood Insurance

by Robert Smith

Originally Published  - May 09, 2016

Virginia O’Neill, Senior VP of the Center for Regulatory Compliance with the American Bankers Association (ABA), sent a letter on behalf of the organization to the Federal Reserve Board, FDIC, and OCC on April 22, 2016 to address growing concerns about how some bank examiners are treating the advancement of force-placed flood insurance premium. Reports to the ABA have indicated that some examiners have taken the position that advancing premium increases a loan, which would make it a MIRE event (wherein a loan is made,increased, renewed, or extended).

The ABA has requested the agencies to issue guidance on the matter, and to clearly establish whether advancing premiums constitutes a MIRE event. If so, they have asked the agencies to explain how banks may avoid creating a MIRE event in meeting their obligations for force placing flood insurance.

It would be best for the banking industry and consumers if the agencies take heed of the concerns raised by the ABA. As Ms. O'Neill so excellently describes, the prospect of treating charges for premiums as a MIRE event presents considerable challenges and complications both to the bank and the borrower. It is, perhaps, even worse in the case of the borrower. To comply with this interpretation, a bank must either estimate or wait until charges are made. While this is difficult for the bank, the borrower could end up in a frustrating position, receiving letters from multiple cycles or being saddled with additional charges.

As it is also explained in the letter, it is readily apparent that Congress' expectation in describing a MIRE event was one initiated by a borrower in the normal course of business they conduct with a lender. To extend that category over charges for force-placed flood insurance, required under the law when a borrower does not maintain insurance, is unlikely to provide real protection for either party. Keep an eye out for the agencies to reply, especially if examiners continue to penalize banks based on this opinion. With the implications involved, it may be important for the agencies to take up this question sooner rather than later.

"60 Percenters" Changes To Internal Force-Placed Insurance Workflows

Originally Published - Mar 22, 2013

In April, we will be releasing our "9 Steps to CFPB Compliance for Force-Placed Insurance" marketing efforts.  This will be a comprehensive approach that loan servicers will need to follow to make sure that they are compliant with their force-placed insurance program by next January.  Take aways from these efforts will be a white paper which will be released in April, as well as a webinar on April 11th at 2 pm EDT.

 Needless to say, we have been very busy here at Miniter Group.  We have a record number of loan servicers we have contracted with to outsource their insurance tracking and force placement workflows.  All of these lenders are experiencing how we can significantly reduce NIE in their loan servicing department by outsourcing to Miniter.

 There are other lenders who have proactively committed to keeping insurance tracking in their loan servicing departments.  For those folks, we have consulted with them on CFPB Compliance as well as provided notification placement tools to help them become compliant in their shops.

The last, and by far the largest group of lenders understand that internal force-placed insurance workflows need to change, but have not yet kicked off a project to address the issue.  In talking with these bankers, my conclusion is that they are not procrastinating, they simply don't know where to start. If you are in this group, you're not alone.  I'm estimating that over 60% of the banks I have talked with fall into this category.

 Hence the reason we are publishing "9 Steps to CFPB Compliance for Force-Placed Insurance"  If you are one of the "60 Percenters,” make sure you sign up for our newsletter  to get your copy as well as attend the webinar to discuss implementing the 9 steps which will follow on April 11th at 2:00 pm EDT.

If you have questions on how to get started on your project, email me at jim.gilpin@miniter.com or call me at 1-800-MINITER (646-4837).

Thoughts on the New CFPB RESPA Regulations

Originally Published - Nov 28, 2012

This week, Miniter Group will publish a white papertitled "CFPB Guidance for Force-Placed Insurance".  This white paper was a result of our popular ComplianceWebinar Series that has been dealing with the regulatory issues around force-placed insurance.   

During these webinars, we found that many lenders were confused about the new force-placed insurance requirements.  This white paper describes the issues around escrow processing, closed end loans, CFPB designed form letters, and proof of insurance requirements.  Included in the white paper is a check list to make sure a lender’s force-placed insurance program is compliant with the new guidelines that go into effect in January 2013.

Many of our lenders with Assets greater that $10 billion have CFPB audits scheduled into 2013.  It is going to be interesting to see how the CFPB is going to enforce these new regulations.  They spent a lot of time and effort to field test their notification letters, so I would suspect that this will be a top priority for CFPB compliance and criticism.

Just last week, we completed thesoftware update of our "Write-Your-Own" and "Outsource Tracking" systems.  These updates provide 100% compliance to the new Regulation X (RESPA) force-placed insurance regulations. 

When we originally designed our force-placed system in 2006, we followed the 1996 Model Act that provided guidance for CPI insurance for indirect auto portfolios.  We had thought that one day, similar guidance would appear on the force-placed mortgage portfolios as well.  As we all know, the Dodd-Frank Act provided that guidance in 2010.  

Guess what???  The Dodd-Frank act used the guidance from the CPI Model Act….  Was that luck or did we have a crystal ball???

Regardless of the answer, our web-based systems only required very minor tweaks, mainly to our automated outbound mail systems, to meet the requirements of the new regulations.  I don't know how the other industry insurance trackers are doing with their modifications, but I'd bet more than a few bucks that we are the first tracker to complete the modifications.

Small lenders that may be overwhelmed with these new regulations should give us a call to talk about solutions for your loan servicing department, or total outsource solutions that will reduce NIE in the servicing department.

The Long Road Ahead in The Banking & Force-Placed Insurance Industries

Originally Published - Oct 03, 2012

We started a LinkedIn group last week named Banking & Force-Placed Insurance. The group was started to begin to share some of the compliance information regarding the guidance and litigation around force-placed insurance. As well, it will be a place where we can begin to share some of our concepts on Borrower-Centric Insurance Tracking.

LinkedIn allows you to send an invitation to 50 of your contacts at a time, so I started sending invitations out to my contacts. It wasn't more than a few hours and I saw that I had 4 comments that were waiting approval for the group. I was excited to see these comments and was ready to get the group going. To my surprise, the four comments ended up being a dissertation from an individual who was an ex-employee of both an insurance tracking company and a large bank.

This person, a self proclaimed expert on force-placed insurance, went on and on about the injustice of force-placed insurance. If he wasn't so irrational, I would have engaged him in the debate. I chose not to…

If you spend as much time as I do reading class action lawsuits, regulatory guidance, and comments around the web on force-placed insurance, you know the very negative attitudes from borrowers who have been force-placed by some of the fee-income producing tracking operations. We as an industry have a long way to go to clean up our reputation. We have been painted with a very broad brush, and unfortunately 7,000+ banks out of the 7,204 federally insured banks are going to have to wrongfully wear this paint for some time.

Defending Force-Placed Insurance - Part V: 6 Things You Need To Know

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

 


Eliminate Fees

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.

Borrower Notifications

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.

Defending Force-Placed Insurance - Part IV: The Regulatory Enviroment

In Part IV of this blog series I’ll review the history and current scrutiny around force-placed insurance.  From this review, we will begin to get an idea of which operational and reputational risks are being scrutinized.  If you’re responsible for the force-placed insurance program at your institution, you will have the basic information needed to complete a risk assessment of your own program.

Dodd-Frank wasn’t the Beginning?

If you talk with most folks in our industry, they all tend to point to the Dodd-Frank bill that enabled the attorney generals (AG’s), and later the CFPB to have oversight of force-placed insurance.  We will talk about this authority in a moment, but everyone should understand that scrutiny of force-placed insurance actually began in November 2010 from Wall Street.  Jeff Horwitz, who does a good job of covering force-placed insurance for American Banker, published an article titled “Losses from Force-Placed Insurance Are Beginning to Rankle Investors”.   The article quotes investors who were not happy with Bank of America owning Balboa Insurance, one of the largest forced placed insurers in the country.
  
So why is Wall Street complaining?  Are they actually defending consumers?  Not really.  When a loan that was sold to the secondary market goes delinquent, servicers force place insurance to protect the collateral through the right to cure period as well as an OREO until the collateral is liquidated.  Guess who pays the forced placed bill since the consumer is no longer in the picture? It’s the Wall Street investors…..this is where I believe the scrutiny on force-placed insurance began.

Dodd-Frank and Force-placed Insurance Oversight

Section 1463 of Dodd-Frank modifies the Real Estate Settlement Procedures Act of 1974 to include 3 new sub sections under Section 6.  I created an outline below of this modification so we are all on the same page with regard to the requirements of Dodd-Frank….
 

  • Subsection K – Servicer Prohibitions
    • Shall not obtain force-placed insurance unless there is a reasonable basis to believe the borrower has failed to maintain insurance
    • Shall not charge fees of responding to requests.  These fees will be later defined by the CFPB.
    • Shall not fail to take timely action in responding to borrower’s requests.
    • Shall not fail to respond within 10 days to borrower requests for contact information of the owner or assignee of the loan.
    • Shall not fail to comply with future CFPB regulations
  • Subsection L – Requirements for force-placed insurance.
    • The servicer does not have a reasonable basis for obtaining force-placed insurance unless the servicer sends the following series of notifications by first class mail:
      • 1st Written Notice
        •  Remainder of contractual obligation to maintain insurance
        • Statement that the servicer does not have evidence of insurance on the subject property
        • Clear and conspicuous statement of procedures by which the borrower has insurance coverage
        • Statement that the servicer may obtain coverage at the borrower’s expense if no proof is provided.
      • 2nd Written Notice
        •  Sent at least 30 days after the 1st Written Notice
        • Contains the same requirements of the 1st Written Notice
      • The servicer may place insurance 15 days after the 2nd written notice was sent.
    • Sufficiency of Demonstration:  
      • Servicer shall accept any reasonable form of written confirmation which includes:
        • Existing Insurance Policy
        • Identity & contact information of the insurance company or agent
        • Or additional requirements of the CFPB
    • Termination of Coverage
      • Within 15 days of receipt of borrower coverage
        • Terminate the force-placed insurance
        • Refund forced placed coverage premiums where there was duplicate coverage
        • Refund all related fees
  • Subsection M:  Limitations on force-placed insurance
    • All Charges shall be “bona fide and reasonable”

I’ll just comment briefly on some of these requirements as I will go into more details in part 5 of this blog.  The overall “theme” of this requirement is that servicers must provide much more service to the borrowers with regard to force-placed insurance.  You can see the act prohibits fees in two different places and requires timeframes for notifications and refunds.  The core of these requirements come' from the NAIC Model Act which was written for forced placed auto insurance in 1995.
  
The Sufficiency of Demonstration requirement requires that the borrower provide basic written information to prove valid insurance.  I am predicting that this requirement, once scrutinized by the CFPB, will require very broad changes to the current methodology of force-placed insurance.  This requirement will be the catalyst for improving the borrowers experience with force-placed insurance servicers.  More on this in Part V of the blog.

Beyond Dodd-Frank….  The history of Litigation and Scrutiny of Force-placed Insurance.

The remainder of this blog will detail the chronological history of various lawsuits and regulatory actions with regard to force-placed insurance.  These fall into 3 main categories; Class Action Lawsuits, Attorney General Actions and Fannie Mae Requirements. 
 

  • 2010
    • Florida Lawsuits – A number of lawsuits were filed by individual borrowers where servicers had force placed insurance on their properties.  Allegations include excessive rates, placement of redundant coverage, and coverage for perils not required in the loan documentation.  One case I looked into had rates that were more than 3 times higher than the highest rate our company can charge in Florida.
    • California Class Action Lawsuit – (Hofstetter v. Chase Home Finance, LLC) which challenges the practice to force place flood insurance on HELOCS with a zero loan balance.  The court issued an order allowing class action status in March of 2011.  Chase reportedly settled the case for just over $10 million in cash and agreed to stop collecting commissions on force-placed insurance.
  • 2011
    • Lawsuits Across the Nation – According to American Bankers, there were at least 10 lawsuits in progress against Bank of America, Wells Fargo, JP Morgan Chase, BRS Citizens and US Bancorp.  
    • New York Department of Financial Services – Begins a probe into force-placed insurance practices in the state of New York.
  • February 2012
    • Banks Agree to $25B Robo-Signing Settlement – 5 banks agree to the largest joint state-federal settlement in history.  The five banks include: Bank of America ($11.8B), JPMorgan Chase ($5.29B), Wells Fargo ($5.35B), Citigroup ($2.2B), Ally Financial ($310M).  The significance of this settlement is that Section III E provides guidance for force-placed insurance.  This guidance is very similar to the Dodd-Frank guidance discussed above with the addition of a requirement to offer insurance escrow services to the borrower as part of the initial written notice.
    • Wells Fargo – QBE Insurance Class Action Lawsuit – According to the Harke Clasby & Bushman LLP website, the class action lawsuit alleges Wells Fargo and QBE Insurance conspired to inflate and profit from force-placed insurance when issuing more than 20,000 policies in Florida from 2009 to 2011. 
  • March 2012
    • CFPB - announced that it will issue mortgage servicing rules that will impose new limits on force-placed insurance.  The announcement was made by Richard Cordray at a speech to the National Association of Attorneys General in Washington 
    • RFP for Force-Placed Insurance – On March 6th, Fannie Mae issued an RFP to major force-placed insurance carriers in an attempt to lower the cost of premiums to the Fannie Mae borrowers and investors.  The goal of the RFP is to:
      • Eliminate servicers from passing on commissions and service fees to Fannie Mae
      • Eliminate servicers from passing on the cost of insurance tracking
      • Separate commissions and fees to ensure transparency
    • Fannie Mae releases Servicing Guide Announcement SVC-2012-04 – On March 14th, Fannie Mae released an update to amend and clarify servicing requirements related to Lender-Placed Insurance.  This announcement addressed the following issues which needed to be implemented by June 1, 2012:
      • Force placing insurance on delinquent accounts prior to and past 120 days
      • Deductible amounts based on loan balance.
      • Borrower written communications (similar to Dodd-Frank)
      • Insurance carriers must be filed and approved in states where loans are serviced
      • Borrower refunds must be processed within 15 days
      • Servicers will no longer be reimbursed for tracking expenses
      • No co-insurance clauses
  • May 2012
    • NY DFS Holds Hearing on Force-Placed Insurance – 5 bank- owned insurance agencies, Assurant, QBE, Bank of America, GMAC Mortgage and other servicing companies testified at the NY Department of Financial Services public hearings on force-placed insurance held May 17-21 in New York. 
    • Fannie Mae postpones implementation of SVC-2012-04  -  On May 23rd, Fannie Mae released a servicing notice to postpone the implementation of the “Updates to Lender-Placed Insurance and Hazard Insurance Claims Processing originally released in March.  Fannie Mae “encouraged servicers to implement as many of the requirements as practically feasible”.
  • June 2012
    • NY DFS Demands Lower Force-Placed Insurance Rates – The result of the May Hearings is that insurance companies providing force-placed insurance products in New York had until July 6th to resubmit rates for NY DFS approval.  Companies included Assurant, the QBE Insurance Group and American Modern Insurance Group.  These companies make up more than 90 percent of the force-placed insurance market in New York.  "The more attention paid to the force-placed insurance issue the better," says Benjamin Lawsky, the Superintendent of New York's Department of Financial Services. "Our hearings made clear there is a need for fundamental reform."
  • July 2012
    • National Association of Insurance Commissioners (NAIC) to Review Force-Placed Insurance – The NAIC, which is the standard setting body for state insurance regulators, announced plans to hold hearings on force-placed insurance.

Risk Managers at lenders need to familiarize themselves with the common denominators clearly shown above in the legal and regulatory actions around force-placed insurance.  Force-placed activities at lenders will be subject to operational and reputational risks at the bank for the foreseeable future.
  
Please feel free to join our Compliance Counter Webinar scheduled for Monday August 6th at 2 pm EDT to get more insight into the common denominators that will drive the operational and reputational risks in the coming months.

For the last 4 parts of my blog, I have laid out the history and issues associated with force-placed insurance.  In Part V, which is the final part of this blog series, I will describe what the future must look like for force-placed insurance.  The borrower will no longer be the force-placed red headed stepchild.  See you next week.

Jim Gilpin is Miniter Group's EVP of Business Development
He welcomes feedback to this blog at www.miniter.com/blogs
Follow Jim on Twitter at @JimGilpin

Defending Force-Placed Insurance – Part III: Understanding Banks

At the conclusion of part II, we defined the guidance that was available for lenders with regard to force-placed insurance, and mentioned how the largest banks have taken a tried and true collateral risk transfer product and turned it into a bank fee income product.

For 100’s of years, traditional banks had grown organically as their net income was transferred to risk capital on their balance sheets.  Banks made money by collecting deposits in the form of checking accounts and CD’s and then used this money to make loans to both consumers and local businesses.  The difference between the interest paid to the depositors and the interest collected on loans is known as net-interest margin.  This was the primary income source for banks.  Like other businesses, traditional banks “bought” deposits low and “sold” loans high.

Under this business model, banks that operated on net-interest margin did not possess the capital to acquire more than one or two banks.  All this changed with the Bank Holding Company Act of 1956.

Wikipedia defines the benefits of bank holding companies as follows:

Becoming a bank holding company makes it easier for the firm to raise capital than as a traditional bank. The holding company can assume debt of shareholders on a tax free basis, borrow money, acquire other banks and non-bank entities more easily, and issue stock with greater regulatory ease. It also has a greater legal authority to conduct share repurchases of its own stock.
 
The downside includes responding to additional regulatory authorities, especially if there are more than 300 shareholders, at which point the bank holding company is forced to register with the Securities and Exchange Commission. There are also added expenses of operating with an extra layer of administration.


Bank Holding companies were able to raise large amounts of capital as publically traded companies.  This allowed a few very aggressive bank holding companies to acquire a large number of smaller banks to become some of the largest banks in the world.

Here are a few facts from the FDIC….

• 7300 FDIC Insured banks in the USA

• $13.9 Trillion in assets at FDIC insured banks

• $7.8 Trillion of these assets are controlled by 4 banks
 

This represents 56% of all assets at FDIC banks are controlled by 4 of the 7,300 banks.  Not quite the 80/20 rule!

I described net-interest income in the paragraphs above.  This is one of two major income streams for banks.  The other is called non-interest income, or may be called “fee income”.  This is revenue generated from other activities within the bank not associated with interest.  This includes checking account fees, loan origination fees and investment fees.  In addition, if a large bank owns an insurance operation, the net income derived from commissions is also categorized as fee income on the bank’s income statement.

Let’s compare the ratios of net-interest income and fee income for various size banks:
 

forceplaceblog3chart.jpg


The table above is generated from the most recent call reports from typical banks within the asset size groupings.  As you can see from the table above, trillion dollar banks rely on fee income to drive 49% of their revenue, where mid-size and community banks still rely on net interest income and only derive 15-17% of their income from fees.

So here is my opinion on why the largest banks are currently under scrutiny for force-placed insurance.
 

1. These banks are actively traded and they are under constant scrutiny from Wall Street analysts to drive earnings.  Fee income represents half of their income.

2. These banks all have insurance operations that began taking large commissions on force-placed insurance which in turn drove fee income to the bottom line.

3. Force-placed insurance providers did not properly advise these large clients with regard to potential operational risks associated with commissions and fees associated with force-placed insurance. 

4. Bank risk managers did not properly evaluate operational & reputational risks associated with force-placed insurance as a fee income product.
 

So in items 2 through 4 above, a few risk managers from both the insurance and banking industries ignored the guidance that was available from the 1996 NAIC Model Act and changed a proven collateral risk transfer technique into a fee income banking product.  

Over the next few years, as litigation moves through the courts, we will re-live the force-placed industry’s history that was originally created in 1991.   As history repeats itself, a very few banks will once again paint the entire force-placed industry with a very broad brush.

In conclusion, I hope I have shown that not all banks need to operate their force-placed program as a fee income product.  The above table shows that over 99% of banks continue to operate with net interest margin as their primary income source and are not under pressure to use force-placed insurance to drive fee income.  The vast majority of these banks continue to utilize force-placed insurance as it was originally designed:  a risk management tool used to transfer collateral risk.

In Part IV, I will bring you up to speed on all of the regulatory and civil actions that are taking place with regard to force-placed insurance.  We will discover the common denominators that make up the operational and reputational risks that were not properly managed.

Jim Gilpin is a principal and EVP of Miniter Group, who is a provider of collateral risk management solutions to the lending industry.  In 2007, Miniter introduced borrower-centric approach insurance tracking for forced placed insurance.  To learn more about Borrower-Centric Insurance Tracking, visit Miniter’s informative website at www.miniter.com and follow Jim on twitter at @JimGilpin 

Defending Force-Placed Insurance – Part II: How FPI is Supposed to Work

Originally Published - Jun 28, 2012

In the first part of this series we introduced the concept of collateral risk using my Bluefin fishing example.  In this Part, we are going to get into the history of force-placed insurance which will lead up to the mess our industry is in today.

First, let’s finish the Bluefin fishing story to help us understand the way force-placed insurance is supposed to work.  If you recall from Part I, I had forgotten to renew the insurance on my boat.  The boat was destroyed by a whale and sank while I was uninsured.  

What happened behind the scenes was that my insurance company had sent me a renewal notice 20 days prior to my expiration that I never read.  They also sent my bank a similar lienholder renewal notice since they were listed as lienholder on my insurance policy.  When I failed to renew my insurance, my insurance company sent both my bank and I cancellation notices.
  
Although I didn’t open my mail, my bank did, and they promptly issued force-placed insurance to protect the collateral.  When they did this, I was sent the first of 3 notifications of the force-placed insurance….that letter never got read, just like the other insurance notices I received.

On the day after my boat sinking, once I realized that I didn’t have insurance, I made a call to my bank to inform them of the bad news.  I was still on the fence as to whether I would continue to pay the loan…..I knew very well that I still owed the money….

My bank informed me that they had force placed a limited dual interest policy on my boat and that the loan balance on my boat loan would be paid by the insurance.  I was thrilled.  What a pleasant surprise that my loan balance was paid off.  I lost a little bit of equity in the boat, but all in all I was still alive and didn’t have to keep paying the bank.

This is how force-placed insurance is supposed to work.  The lender is insured for the outstanding loan balance.  Because the insurance claim paid the bank, my outstanding loan balance was paid and I didn’t owe them any money.  We’ll get into more detail about the mechanics of forced placed insurance in the next section.

Force-placed insurance is not something new.  This collateral risk transfer technique has been around for some time protecting collateral in mortgage and auto portfolios.  It was widely used with consumer auto portfolios in the late 80’s and early 90’s and was known as collateral protection insurance (CPI).

The way CPI works is as follows:

1. The borrower agrees to maintain insurance as part of the promissory note at loan    origination.
2. The lender is listed as lienholder on the borrower's auto policy
3. The lender tracks the borrower insurance notices to make sure the collateral has insurance
4. If the borrower’s insurance lapses:
a. The lender force places insurance to protect their interest in the collateral
b. There is no liability coverage for the lender or the borrower, since the borrower, not the bank, has title to the collateral
c. The force-placed policy may be single interest or limited dual interest
i. Single Interest:  Coverage only applies to the lender if the loan is impaired after repossession
ii. Limited Dual Interest:  Coverage extends to the borrower while the collateral is in their possession.
d. Any claim will be settled as the lesser of:
i. Outstanding loan balance
ii. Actual cash value of the vehicle if totaled
iii. Damage amount on the vehicle
 

When the lender force places insurance on collateral, they are obligated to pay the premium to the insurance company regardless of how they collect this same premium from the borrower.  It became common practice in the late 80’s to bill the borrowers for the premium by placing a balloon note at the end of the loan term, or by simply extending the term of the loan to pay for the force-placed premium.

This all came to an end in Alabama in 1991.  A borrower who had paid their loan as agreed went to the bank to get the title to their car.  When they asked for the title, the bank clerk responded that they were unable to release the title because there was still a balance of over $4,000 for force-placed insurance.  The borrower had no idea that force-placed insurance was in effect.   The borrower went across the street to their lawyer and this started a series of class action law suits resulting in dozens of settlements totaling over $100 million during the next 4 years.

During the height of these lawsuits, the National Association of Insurance Commissioners convened to create the Creditor-Placed Insurance Model Act which was published on July 8, 1996.  This model act created the first guidance document for forced placed insurance.  The guidance centered around 7 topics:
 

1. Created separation between the creditors and the insurers
2. Forbid balloon payments or extending loan terms to pay insurance premium
3. Created a borrower notification process
4. Limited the force-placed policy term to 1 year
5. Premium refunds had to be processed in 60 days
6. Set underwriting targets designed to a 60% loss ratio
7. Rebates to creditors were not allowed.
 

The force-placed industry adopted this act on auto portfolios and began to rebuild the CPI product over the next 5 years, but this guidance was never widely adopted on mortgage portfolios.

With guidance available from the NAIC Model Act, where did the industry veer off track?  That answer begins in 1996, coincidentally the same year that the Model Act was adopted.  In that year, banks began to get involved in the insurance business.  The Supreme Court decision Barnett Bank v. Nelson concluded that state regulation could not unreasonably interfere with the insurance activities of banks.  Banks getting involved with insurance activities were further strengthened 5 years later with the passage of the Gramm-Leach-Bliley Financial Services Modernization Act which further expanded the bank’s ability to provide insurance.

So the table was set.  Force-placed insurance for mortgage portfolios could have adopted guidance from the NAIC Model Act, but the industry as a whole chose to ignore this guidance.
  

• Separation between creditors and insurers was blurred with passage of the G-L-B Act.
• Borrower notification cycles were at times implemented, but not in a consistent basis.
• Premium refunds to borrowers were not completed on a timely basis.
• The 60% targeted loss ratio was not implemented.
 

Each of these issues by themselves may have been regulated successfully by industry competition, but the straw that broke the camel’s back was that the industry did not follow the guidance regarding prohibiting rebates to creditors.

In the next part, we will attempt to understand why forced placed insurance transformed from a tried and true collateral risk management tool to a fee income product that spread like cancer through the largest banks in our industry.

Jim Gilpin is a principal and EVP of Miniter Group, who is a provider of collateral risk management solutions to the lending industry.  In 2007, Miniter introduced borrower-centric insurance tracking for forced placed insurance.  To learn more about Borrower-Centric Insurance Tracking, visit Miniter’s informative website at www.miniter.com and follow Jim on twitter at @JimGilpin

Defending Force-Placed Insurance - Collateral Risk

Originally Published - Jun 06, 2012

Thanks for taking time to look at the brand new Miniter Blog.  I'm Jim Gilpin, one of the principals here at Miniter Group.  I have held almost every job here at Miniter as we grew our company from the 6 New England States to insuring lenders in 42 states.  Currently, I head up Business Development.

Our business is helping our lender clients transfer their collateral risk.  So if we are going to talk intelligently about force-placed insurance, and not get all caught up in the hype, we have to understand collateral risk.  So let's jump in….

No bank is going to lend me $50,000 on my signature alone.  They need collateral to secure that loan.  My collateral might be a car, a home, commercial building, construction equipment or some toy like a boat or an RV.

Whena bank approves my $50,000 loan, it takes two types of risk.  The first risk is whether I will pay them back as agreed...simple...that's credit risk.  The second risk is that the value of my collateral doesn't decrease significantly….If it does, then I'm probably not going to pay the loan back...that's not so simple….that's called collateral risk.

Here's an example….I like to fish for Bluefin tuna.  Here in Massachusetts, Bluefin feed offshore about 18 miles on a place called Stellwagon Bank.  If I want to fish, I need a boat….so it's boat loan time.  When I go to the bank, they have me put down some money and give me the loan.  I had to bring my insurance policy to the bank showing that I had damage insurance on the boat.  The bank is listed as lienholder so they will get notices from my insurance company to monitor the insurance on my boat. 

Next spring, I forget to renew my boat policy and the insurance cancels.  I would never use my boat without insurance, but Ididn't know that the boat was uninsured, soI went fishing in early June.  On that trip, a Humpback whale breeches out of the water and lands on my boat….the boat splits in two and sinks….fortunately, I'm not hurt and get rescued by another fisherman.

When I get to shore and dry off, I go looking for my insurance policy...guess what! ….no where to be found...but you know what I did find….the loan payment coupon for my boat loan, due next week. 

I call my insurance company and they tell me my insurance was cancelled last month…..No policy, No coverage……..

Now….the $50,000 question…...Am Igoing to make that payment on my boat loan next week???

This is collateral risk….pure and simple…..

So I'm going to spend the next few weeks describing for bankers, insurance folks, regulators, lawyers,  the media and my fellow bloggers the details of how force-placed insurance really works.  This explanation will give you plenty of insight into why the industry that I love, and have spent a good portion of my life,  is now in a 50 state witch hunt.

Just to give you some background on me so you can see why I consider myself qualified for the discussion.:

  • Our only business is to supply collateral risk transfer solutions to lenders.  One of those solutions is force-placed insurance.  That’s what I've done full time (and then some) since 1997. 
  • In 2001, I was taught actuarial analysis by one of the best risk managers in our industry. (Notice I didn't say the biggest!).  I have an engineering degree, so the math wasn't that difficult.  All of our carriers accept my analysis of our portfolios on a regular basis. 
  • I graduated from the Consumer Bankers Association's Graduate School of Retail Bank Management in 2006.  I believe I am still the only insurance person to ever graduate from that school.  I figured if I'm going to work to protect banks and bankers, I better understand the theories of banking.
  • I took that knowledge from what I called "Bank Camp" and was appointed to the board of a bank here in Massachusetts.  The FDIC had a letter of understanding with the bank when I got there.  If you're not in banking, a letter of understanding is not a good thing….. The regulator equivalent to one foot in the grave.  That was 2006.  Lots of hard work by the new management team,  and the implementation of much of my graduate school thesis led to our bank becoming the best performing cooperative bank amongst our peers in the state of Massachusetts.
  • Starting in 2005, my team developed an entirely new way todeliver forced placed insurance.   We named it "Borrower -Centric Insurance Tracking"   You think we might have been ahead of our time????   We wrote our system from scratch….every line of code, every workflow.  We developed the software to bring the borrower to the center of our insurance tracking system.  We started marketing our system in 2007.  We service small to mid-sized banks….the right way, which is to put the borrower first….

Enough already about me…..The next part, will review the history of force-placed insurance.  This "ain't the first time" our industry's been to the legal rodeo!!!….  Does history repeat itself?  It certainly did with force-placed insurance….different cause, different time, same result….See you next week…..