Force-placed insurance is a controversial subject. It pulls big players such as Bank of America into big fights.
While it is a necessary function in many instances, the charge for the service often draws ire.
The Federal Housing Finance Agency announced last year it directed Fannie Mae and Freddie Mac to restrict forced-placed insurance practices, which is a follow up from a notice the agency published last March regarding its views on such practices. But that didn't deal with requirements. The Consumer Financial Protection Bureau is in charge of that.
As part of the new mortgage servicing rules from the CFPB there are some definite dos and don'ts both mortgage servicers and insurers need to be aware of.
Luckily, Morningstar Credit Ratings vice president Richard Koch released a handy guide to all the new CFPB rules you need to follow to avoid getting sucked into a force-placed insurance fight.
Considering the recent history of force-placed insurance, it's probably a good idea to brush up on regulatory compliance.
Here are the 5 standards the CFPB puts on force-placed insurance. Follow them.
1. Homeowner must be obviously uninsured
Mortgage servicers must be able to prove from a reasonable basis that a consumer totally failed to keep proper insurance BEFORE charging for force-placed insurance.
2. You must be able to prove the homeowner is uninsured
Beyond a reasonable doubt, this cannot be put into question. The mortgage servicer must send notices AT LEAST 45 days before the charge. The second notice needs to be sent AT LEAST 30 days AFTER the first notice. In another 15 days, if you don't hear from the homeowner, then force-place insure them.
3. Tell the homeowner they are obviously uninsured
Send a letter AT LEAST once a year, although more than once is presumably better. In that letter tell the homeowner they are obviously uninsured. Oh, and send one of those letters AT LEAST 45 days before levying the annual charge.
4. Know when to fold
If the servicer gets proof of insurance from the homeowner, drop the force-placed insurance within 15 days. This is arguably the most important as any overlapping fees or charges need to be refunded to the homeowner. Don't get bitten.
5. Know what to charge
This is a little vague and the greyest area of guidance from Koch. Keep in mind the scrutiny in this industry comes from the "administrative fees." If too much is charged to enough homeowners, they aren't going to complain to you. They'll likely go straight to the CFPB. And whose side is the CFPB on?
In short, put everything in writing and get everything in writing. There are timelines to responding to homeowner requests, as Koch notes, even when the mortgage servicer or insurer does not have a definitive answer. In these cases, an explanation still needs to be provided.
Koch recommends checking out the CFPB website for further information on distinctions between things such as an information request and an error resolution request.