Force-placing insurance could be a hazardous practice if not done appropriately. The Consumer Financial Protection Bureau (“CFPB”) has made force-placed insurance a main focus of its desired mortgage servicing reforms and new rules on the issue are expected to be released by the CFPB as soon as this week. This is in addition to high-profile investigations into force-placed insurance by New York and California. Therefore, it should be no surprise that a significant section of the March 2012 Global Foreclosure Settlement lays out new force-placed insurance standards for parties to the settlement agreement.
The Global Foreclosure Settlement outlines requirements on when force-placed insurance may be placed, what the coverage amount should be, and what disclosures must be provided to the borrower prior to force-placement. While the standards listed in the Global Foreclosure Settlement may seem strict, most of these restrictions first appeared in Title XIV of the Dodd-Frank Wall Street Reform and Consumer Protection Act, entitled the Mortgage Reform and Anti-Predatory Lending Act (“Mortgage Reform Act”). Prior to the Mortgage Reform Act, the restrictions on placing hazard insurance (other than flood insurance) came mainly from investor guidelines and agreements. However, recent changes to the Fannie Mae servicing guide conform with the requirements in the Mortgage Reform Act and the Global Foreclosure Settlement. Additionally, some state regulators are pushing for stricter force-placed insurance standards similar to those in the Global Foreclosure Settlement, notably New York’s Department of Financial Services (“DFS”), which has proposed a servicing standards agreement that several New York regulated servicers have already signed onto. Thus, the Global Foreclosure Settlement’s force-placed insurance standards, far from shaking up the servicing industry, serve mainly to memorialize the changes to the force-placed insurance standards industry-wide since the passage of the Mortgage Reform Act.
The Mortgage Reform Act, Global Foreclosure Settlement, New York DFS agreement, and new Fannie Mae guidelines all attempt to decrease the cost of force-placed insurance for the consumer and increase the burden on the servicer prior to force-placing insurance.
Under the Global Foreclosure Settlement, a servicer must have a “reasonable basis” to believe that the borrower has not maintained the required insurance. This “reasonable basis” standard is also a feature of the Mortgage Reform Act, and both the Global Foreclosure Settlement and the Mortgage Reform Act require a servicer to meet all other force-placed insurance requirements in order to demonstrate that a reasonable basis exists.
For borrowers paying into escrow accounts, the Global Foreclosure Settlement also requires the servicer to continue to advance payments to the insurer regardless of homeowner payments, unless the borrower or the insurance company cancels the existing policy. The servicer must make reasonable efforts to work with the borrower to continue or reestablish the existing homeowner’s policy if there is a lapse in payment and the borrower’s payments are escrowed. The New York DFS agreement requires a servicer to take “all commercially reasonable steps” to continue or reestablish the existing homeowner’s policy.
Disclosure standards under the Global Foreclosure Settlement track requirements under the Mortgage Reform Act and require servicers to provide two separate notices to the homeowner of a lapse in coverage prior to allowing force-placement. Specifically, the first written notice must provide the following information to the borrower:
• A reminder of the borrower’s obligation to maintain hazard insurance on the property securing the federally related mortgage;
• A statement that the servicer does not have evidence of insurance coverage of such property;
• A clear and conspicuous statement of the procedures by which the borrower may demonstrate that the borrower already has insurance coverage; and
• A statement that the servicer may obtain such coverage at the borrower’s expense if the borrower does not provide such demonstration of the borrower’s existing coverage in a timely manner.
The Global Foreclosure Settlement, unlike the Mortgage Reform Act, also requires the first notice to include:
• A statement that the cost of such coverage may be significantly higher than the cost of the homeowner’s current coverage; and
• A statement, in the case of single interest coverage, that the coverage may only protect the mortgage holder’s interest and not the homeowner’s interest.
For first lien loans on the servicer’s primary servicing system, under the Global Foreclosure Settlement, the notice must also include a statement that the servicer will set up an escrow account and advance the insurance premiums if the borrower wishes. It is unclear whether the CFPB’s rules will include any additional notice requirements like those contained in the Global Foreclosure Settlement. However, the CFPB’s proposal on force-placed insurance rules does go further than the Global Foreclosure Settlement in one key respect, by requiring the servicer to include a good faith estimate of the cost of the insurance in the notice, not just a statement that cost of the insurance may be higher.
Under both the Global Foreclosure Settlement and the Mortgage Reform Act, the second notice must be sent 30 days following the mailing of the first notice and include the same information. Then the servicer has to wait 15 days following the mailing of the second notice, with no written confirmation of the borrower’s hazard insurance coverage, before force-placement is allowed. Prior to the Mortgage Reform Act, the Fannie Mae servicing guide mandated only one written notice to the borrower prior to obtaining force-placed insurance coverage. However, Fannie Mae recently made corresponding changes to its servicing guide – now requiring the servicer to contact the borrower at least twice in writing prior to force-placement. The additional notice requirements will increase the costs to servicers and could increase the amount of time the borrower’s property may remain uninsured unless coverage is otherwise maintained.
Termination of Force-Placed Insurance
Under the Global Foreclosure Settlement, a servicer must accept any reasonable form of written confirmation from a borrower or the borrower’s insurance agent of existing insurance coverage. This confirmation must include the borrower’s existing insurance policy number and the identity and contact information for the insurance company or agent, but no other information is required. Within 15 days of receiving this evidence, the servicer must terminate the force-placed insurance and refund to the consumer all force-placed insurance premiums and related fees paid by the borrower when the property was already covered by insurance. Again, these requirements match restrictions in the Mortgage Reform Act, although the time frame for refunding premiums is a slightly longer 20 days under the Mortgage Reform Act. And, while requirements that insurance be terminated and premiums be refunded are not new, requiring that borrowers only provide a reasonable form of written confirmation (instead of actual proof of an insurance policy) and the shorter time frame for servicers to make such refunds are new requirements that originated with the Mortgage Reform Act. Previous guidance from Fannie Mae only required servicers to refund the premiums in a “reasonable time frame.” And the New York DFS proposed standards do not lay out a time frame within which termination and refunds need to occur. However, under the new Fannie Mae servicing requirements, insurance premium refunds must occur within 15 days of the receipt of evidence of acceptable insurance coverage from the borrower. Again, it appears that industry standards are changing to conform with the Mortgage Reform Act, and the Global Foreclosure Settlement merely captures the CFPB’s standards.
Cost of Insurance
The Global Foreclosure Settlement requires that any force-placed insurance policy must be purchased for a commercially reasonable price. This differs slightly from the Mortgage Reform Act’s requirement that the charges be “bona fide and reasonable.” The New York DFS proposed servicing standards agreement also requires that a force-placed insurance policy be reasonably priced in relation to the claims that may be incurred. However, all of the restrictions are based on a reasonableness standard, and there is no indication in the law or the agreements on what constitutes a reasonable price for such insurance.
Amount of Coverage
Finally, the Mortgage Reform Act is silent on required coverage amounts for force-placed insurance and, unsurprisingly, there is a real divergence between the Global Foreclosure Settlement, Fannie Mae servicing guides, and the New York DFS agreement on the appropriate standard for coverage in the absence of the Mortgage Reform Act’s guidance. Under the Global Foreclosure Settlement, the servicer must set the coverage amount at an amount in excess of the greater of replacement value, last known amount of coverage or the outstanding loan balance. Fannie Mae requires the insurance coverage amount to be the last known coverage amount when the borrower is 119 days delinquent, and the lesser of the unpaid principal balance or the replacement cost of property improvements for loans that are 120 or more days delinquent. The New York DFS agreement goes even further, requiring the coverage amount to be the lesser of unpaid principal balance, last known coverage, and replacement cost. Competing standards for force-placed insurance coverage could be difficult for servicers to reconcile, especially since many state laws also separately regulate force-placed insurance coverage.
While the force-placed insurance standards in the Global Foreclosure Settlement are not applicable to all servicers, the requirements in the Mortgage Reform Act, along with changing investor requirements and pressure from state regulators, appear to be rapidly moving the industry toward these more stringent standards.