Forcing Foreclosures with Forced-Placed Insurance

by 09 May 2012

(TheNicheReport) -- Force-placed insurance has always been a thorny issue of the mortgage lending and servicing industry, and according to the U.S. Consumer Financial Protection Bureau (CFPB) and some state financial regulators the issue has become even thornier. Banks that force high-priced insurance policies on their mortgage borrowers are leading them to foreclosure, according to a recent rulemaking proposal by the CFPB.

The letter indicating the proposal is entitled “Putting the ‘Service’ back in Mortgage Servicing – No Surprises, No Runarounds.” The catchy title seeks to call attention to the force-placed insurance practice, which according to a recent report in Bloomberg can be exorbitant enough to send borrowers down the foreclosure path.

Why Insurance Policies are Forced

Mortgage contracts typically require that borrowers insure their homes against loss that could arise from fires, floods, earthquakes, hurricanes, and other natural disasters. These contracts usually contain a clause of provision whereby the lender or servicer is allowed to force a policy onto borrowers who allow their insurance to run out, or who fail to amend the terms of their coverage.

The forced placement of insurance policies is at the borrower’s cost. The Bloomberg report indicates that some mortgage lenders have reached unscrupulous agreements with insurance companies that offer exorbitant policies. The banks pay for these policies, but they may be getting a commission from the insurer in the process. The premium and the commission are then passed on to the unsuspecting borrower.

The commission can be as high as 15 percent, according to an investigation by a consumer advocacy group in New York. It is estimated that $5.5 billion worth of insurance premiums were forced onto American borrowers in 2010.

In states like Florida, where insurance premiums are typically high, force-placed insurance can end up costing the borrower ten times what they used to pay. Insurance policies are often forced onto borrowers who had problems making their monthly premium payments to begin with. Homeowners who allow their policy to lapse due to non-payment are the most affected by these high-cost policies.

Mortgage lenders claim that forced-place policies protect the homeowners, but in the end these policies are solely for the benefit of servicers and investors. Borrowers who cannot make escrow payments on these forced premiums are at a higher risk of default and foreclosure.

The CFPB proposal seeks to stop force-placed insurance abuse by requiring lenders to communicate their intentions to borrowers at least 45 and 15 days before they take action. Good faith estimates on the policies would also be required from the lender, as well as clear warnings against the risk of foreclosure.


Should CFPB have more supervision over credit agencies?