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.
- 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.
- 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