Cracking Down on Force-Placed Insurance

The problem of force-placed insurance abuses is under increased scrutiny at the federal level.  Recently, Richard Cordray, Director of the Consumer Financial Protection Bureau (CFPB) announced that the CFPB will issue mortgage servicing rules this year that would impose new limits on force-placed insurance products.  In a speech to state attorneys general, Cordray, says the CFPB will issue rules “to prevent (mortgage) servicers from charging for this product unless there is a reasonable basis to believe that borrowers have failed to maintain their own insurance.” Fannie Mae aso just announced a move toward action, saying it would solicit proposals from insurance companies seeking to compete for its force-placed business.  Fannie Mae also said it would issue guidelines to mortgage servicers on when and how to obtain force-placed policies, and on what costs would be reimbursable.  Finally, the recent state attorney general and federal government $25 billion mortgage servicing settlement, which was filed this week, addresses force-placed insurance abuses with the five bank participants.

Force-placed insurance is an insurance policy taken out by a mortgage servicer at the homeowner’s expense, and usually at an excessive cost, when they believe (even if incorrectly) that a homeowner’s previous insurance has lapsed.   The force-placing of expensive homeowner’s insurance is a well-known problem to consumer advocates.  The basic structure of the mortgage servicing industry seems to encourage this type of abuse.  Servicers have substantial incentives to impose significant fees on homeowners rather than keep mortgage loans from performing well.  For example, a servicer who imposes force-placed insurance, through an affiliate, which results in the homeowner’s default, stands to collect thousands of dollars through the force-placed insurance and late fees, and even more money if the loan ends in foreclosure, due to title insurance and broker price opinions ordered through affiliates.

Additionally, these abusive and illegal practices in the mortgage servicing industry can ultimately lead to a wrongful foreclosure.  The results of a new survey published by NACA, the National Consumer Law Center (NCLC) and the National Association of Consumer Bankruptcy Attorneys (NACBA) show that mortgage servicers continue to initiate foreclosure proceedings improperly, either while a homeowner is awaiting a loan modification or due to improper fees or payment processing.  Almost 60% of the respondents represent homeowners who were placed into foreclosure in the past year where there was an improper assessment of force-placed insurance.  In the last year alone, 260 survey respondents reported representing over 700 homeowners with force-placed insurance.

At every stage of the process, from loan modification evaluation through foreclosure, servicers continue to deal with homeowners unfairly.  These pervasive consumer abuses in the mortgage servicing market continue to demonstrate the need for national servicing standards that are enforced on all servicers across the country.  We hope the CFPB, in coordination with other state and other federal agencies, deliver strong national servicing standards this year.