By David N. Anthony, Alan D. Wingfield, Nicholas R. Klaiber and Virginia Bell Flynn
On January 17, 2013, the Consumer Financial Protection Bureau (CFPB) released a rule creating stringent requirements for servicers imposing force-placed insurance on homeowners. A summary of the rule from the CFPB may be found here.
The rule requires that servicers conclude, on a case-by-case basis, that there is a reasonable basis for believing that borrowers lack the necessary insurance. Force-placed insurance typically costs much more than standard policies, in some cases soaring to more than ten times the cost of the homeowner's previous policy.
The rule also requires that a servicer notify a borrower twice before charging for force-placed insurance - first, at least forty-five days before any charge is imposed, and then a second time fifteen days prior to any charge. The latter notice must include a good-faith estimate of how much the force-placed insurance would cost. The servicer also must terminate the force-placed insurance within fifteen days of receiving evidence that the borrower has obtained the necessary insurance. The servicer has a duty to refund any premiums for periods of overlapping coverage. The rule also prohibits servicers from obtaining force-placed insurance if the servicer may continue the borrower's insurance by, for example, funding an insurance escrow account.
Federal regulators previously voiced concern over force-placed insurance. Last year, Fannie Mae sought to lower force-placed insurance fees, noting that such costs made it even more difficult for struggling homeowners to avoid foreclosure. Agencies in California, New York, and other states also have scrutinized rates charged for force-placed insurance and criticizing purported kickbacks paid by insurers to servicers.
Despite the interest by federal and state regulators, the new rule does not limit the period for which servicers may charge retroactive premiums or directly address commissions paid to servicers from insurance companies. Consumer advocates had pressed the CFPB to act on these issues, contending that without rules curbing retroactive fees and commissions, servicers would have little incentive to quickly notify the homeowner of any lapse in coverage or choose the most economical force-placed policy. It remains to be seen if this new rule represents the CFPB's final attempt to regulate force-placed insurance, or whether it is only the first step in an ongoing effort.
© TROUTMAN SANDERS LLP. ADVERTISING MATERIAL. These materials are to inform you of developments that may affect your business and are not to be considered legal advice, nor do they create a lawyer-client relationship. Information on previous case results does not guarantee a similar future result.
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